World economy slows

If there were any doubts that the world economy is decelerating, they must all have been dispelled by now.

On 6 August, the US Labor Department reported that the American economy added 32,000 net jobs in July, the lowest gain since December last year and well below economists' expectations of over 200,000 jobs. This raises doubts on the sustainability of the ongoing economic expansion.

Economists surveyed in the Blue Chip Economic Indicators newsletter recently cut their projections for 2004 growth in US gross domestic product to 4.4 percent, down from 4.5 percent forecast a month ago. It was the second straight monthly downgrade.

The projection for 2005 growth was also cut a tenth of a percentage point from the month-ago forecast to 3.7 percent.

Retail sales in the US in July rose 0.7 percent, according to the US Commerce Department. This was smaller than what most economists had expected, although it reverses the decline in June, which itself was cut to 0.5 percent from an originally reported 1.1 percent.

Whether the consumer can continue to prop up the economy is still a question. Adding to the concern posed by the weak labour market is the fact that the University of Michigan's index of consumer sentiment fell to 94.0 in early August from 96.7 at the end of July. The current conditions component rose to 108.4 from 105.2 in July, but the expectations index dropped to 84.7 from 91.2.

The slowdown is not restricted to the US.

In Japan, the economy grew at a 1.7 percent annualised rate in the second quarter, well below the rate forecasted by economists. It was also much slower than the 6.6 percent rate in the first quarter.

Business spending unexpectedly stalled, being unchanged from the first quarter. Consumer spending rose 0.6 percent, nearly half of the revised 1.1 percent gain in the first quarter.

In fact, Japanese industrial production actually fell in June by a seasonally adjusted 1.3 per cent from May as electronics companies sought to curb inventories on concern that global demand will slow.

It was similar news in South Korea, which saw industrial output in June falling by 2 per cent. This, together with weak domestic demand, induced the Bank of Korea to lower its overnight inter-bank call rate target for August by a quarter point to 3.5 percent last week.

Of the major economic blocs, only Europe showed little sign of a slowdown, possibly because growth there had not been overly strong in the first place.

The 25 countries in the European Union saw second quarter economic growth of 0.6 percent from the first quarter and 2.2 percent from the corresponding quarter last year. That compared to a 0.6 percent quarterly rise and a 1.7 percent annual rise for the whole EU in the first quarter.

The economic growth was led by France, which grew 0.8 percent in the second quarter, while Germany's economy expanded by 0.5 per cent in the second quarter.

In the US, the slowdown in consumption has been largely expected, considering the high consumer debt levels and the waning effects of fiscal stimulus from federal tax cuts. However, economists had pinned their hopes for continued economic growth on capital spending. The latter has not matched the hopes.

The disappointment with regards to capital spending has been acutely felt in the technology sector. Corporate news flow here has been largely bad. Intel, Nokia, National Semiconductor, Cisco and Hewlett Packard all recently reported rising inventories and/or weaker sales outlooks.

Not all technology companies are suffering, though. Recently, computer giants Dell and IBM both projected continued growth, as did Taiwanese chip foundries TSMC and UMC.

Indeed, some analysts think the recent falls in stock prices in the technology sector may have been overdone. For example, Roy Phua, technology sector specialist at DBS Asset Management, told The Edge Singapore recently that the falls in stock prices in the technology sector may have created buying opportunities for investors.

"We were concerned about technology [early this year] mainly on high expectations," he said. "Now, with the widespread bearish sentiments, we are looking to turn positive on tech...In some cases such as semiconductor stocks, current valuations are discounting a deep recession, which appears overly pessimistic given available data. Should some level of demand return later... there may be some opportunities in the technology sector, especially in the hardware arena."

So, economic growth is decelerating from the unsustainable pace of late 2003 and early 2004; that does not necessarily imply a recession is just around the corner.

Nevertheless, it is an indication that, with the exception of emerging economies like China and India, prolonged periods of boom are probably a thing of the past.

Softness in US economy may be short-lived

The US economy slowed down significantly in the second quarter. However, while the best part of the economic rebound is probably behind us, the US economy should continue to grow handsomely for quite a while more.

This past week has seen a slew of economic indicators confirming earlier ones that the US economy has slowed.

Earlier this week, the Commerce Department reported that personal spending dropped 0.7 percent in June, although income grew 0.2 percent. It also reported that construction spending decreased 0.3 percent in June.

Last Friday, the US Commerce Department had reported that the US economy grew 3 percent in the second quarter, well below economists' average forecast of about 3.7 percent growth.

However, part of the growth expected in the second quarter appears to have manifested itself in the first quarter instead. The Commerce Department revised the growth rate in the first quarter to 4.5 percent from the previously-reported 3.9 percent.

In any case, these are lagging indicators. What is of more interest to investors are the leading indicators. These provide a more sanguine view of the US economy.

The University of Michigan's index of consumer sentiment rose to 96.7 in July, the highest since January. This gives hope that consumer spending may hold up, possible interest rate hikes notwithstanding.

Manufacturing also appears to be doing well. New orders at US factories rose 0.7 percent in June. The positive outlook is corroborated by the Institute for Supply Management (ISM), whose index of national factory activity rose to 62 in July from 61.1 in June.

Growth in the services sector also appears robust, with the ISM's non-manufacturing index rising to 64.8 in July from 59.9 in June.

Risks to economic growth continue to be high oil prices, terrorism and rising interest rates.

The price for US light sweet crude oil surged past US$44 on Tuesday before falling back below it the following day as concern over tight global oil supply receded somewhat. Economists generally believe that prices at current levels are not likely to hit world economic growth significantly, although Barclays Capital warned in a recent report that "a sustained rise to more than US$50 would probably take oil prices into the range where they would have a noticeable impact on economic activity".

Terrorism remains on many people's minds. The belated alert raised by the US government over the weekend that terrorists had targeted specific buildings in the country three to four years ago did not exactly improve confidence in its ability to combat terrorism. However, probably of greater immediate concern is the terrorism in Iraq and the rest of the Middle East, which affects confidence in oil supply.

Finally, the US economy depends on spending. So far, consumer spending has been a major prop for the economy. Lately, business spending has also picked up, rising at an annualised 8.9 percent rate in the second quarter. However, both forms of spending would be affected by rising interest rates, although Federal Reserve chairman Alan Greenspan has promised to raise rates at a "measured" pace.

These factors pose risks to the economy and bear watching. However, most economists currently do not expect them to derail the economic expansion, at least not yet. In fact, the International Monetary Fund has of late suggested that it might upgrade its forecast for global growth of 4.6 percent this year.

Greenspan also appears to be relatively confident about the economy. In his semi-annual Congressional testimony on monetary policy last month, Greenspan said that "higher prices, by eroding households' disposable income, have accounted for at least some of the observed softness in consumer spending of late, a softness which should prove short-lived". He also told Congress: "There is no real underlying evidence of any cumulative weakness here."

Of course, economic forecasts are notorious for being prone to revision, even those by the Federal Reserve. But at least Greenspan has the means to tinker with the underlying factors, not just with his forecast.

So on the whole, it seems to me that the US economy will, indeed, continue on its expansion path for a while more.