Sunday, May 11, 2003

Nero Fiddles...................

The European Central Bank and the Bank of England kept interest rates unchanged as policy makers wait for signs that rate cuts this year are sufficient to spur an economic recovery. The ECB left its benchmark rate at a 3 1/2 year low of 2.5 percent. The U.K. central bank kept its rate at 3.75 percent, the lowest since 1955. Most economists surveyed by Bloomberg News expect lower rates next month. Lucas Papademos, the ECB's vice president, is among officials to predict growth in the dozen euro nations will rebound in the second half. In Britain, the pound's 8 percent slide against the euro this year may help manufacturers struggling to recover from the worst slump in a decade, by making exports less expensive. ``Rate cuts have been postponed, but only postponed'' said Holger Schmieding, an economist at Bank of America in London and former adviser to the International Monetary Fund. ``For the Bank of England the currency move means there's little harm in waiting. The ECB has missed an opportunity'' to cut rates. Stocks extended their decline. The Dow Jones Stoxx 50 Index fell 1.7 percent to 2298.5 at 1:51 p.m. in Frankfurt. The yield on the 3 percent German government note dropped 2 basis points to 2.25 percent. A basis point is 0.01 percent.
Source: Bloomberg

............................While Rome Burns

Germany was facing the threat of another recession on Wednesday after manufacturing orders fell sharply and unemployment climbed for the 13th successive month. The steep 3.9 per cent month-on-month drop in orders for March, far more than the most pessimistic forecasts, and the jump in unemployment to its highest April level since unification put paid to lingering hopes of an upturn. The numbers even fuelled concern that the fragile German economy, the largest in the eurozone and the third-largest in the world, could slide into recession for the second time in as many years. Germany saw a shallow recession, technically two successive quarters of contraction, at the end of 2001. Economists said the figures were "catastrophic" and would exert more pressure on the European Central Bank to cut interest rates when it meets in Frankfurt today. Bank officials have so far played down market hopes of a cut in its primary interest rate.

But Europe's economy was "on its back. . . there has been no Baghdad bounce. . . no postwar rebound," said Ken Wattret of BNP Paribas. "The ECB seems to be biding its time - but you should never say never in an environment like this." Economists said the weakness of the eurozone and the relentless rise of the euro argued for a cut. The ECB last cut rates in March by a quarter-point to 2.5 per cent. The fall in orders, an important but volatile indicator of future economic developments, was led by a 5.6 per cent drop in domestic demand, the second-biggest decline since the data series began in January 1991.Foreign orders fell 2 per cent after falling 4.2 per cent in February, raising fears that the surging euro is curbing export growth. Jacques Cailloux of Barclays Capital said Europe's largest economy was "now flirting" with renewed contraction. "Falling domestic and external demand is a lethal combination for the economy." Many analysts expect the German economy to contract in the second quarter after marginal growth in the first.

Last week the Berlin government cut its gross domestic product growth forecast for 2003 to 0.75 per cent from 1 per cent. But most market economists think even that is over-optimistic.The bleak outlook was reinforced by a 44,000 rise in seasonally-adjusted unemployment to 4.46m, roughly 10.7 per cent of the workforce and a sharp rise in insolvencies for January. Some economists fear unadjusted unemployment could reach 5m by the winter. Government officials said the latest jobless figures highlighted the urgency of reforms needed to cut crippling non-wage labour costs and improve German competitiveness. But Chancellor Gerhard Schröder's plans to cut unemployment benefit and loosen job protection face stiff opposition from leftwingers in his Social Democratic party and the trade unions.The federal statistical office said insolvencies soared by 42 per cent year-on-year in January to 8,158. Company insolvencies rose by 19.2 per cent.
Source: Financial Times

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