The Hindu : Business : Fears of global slowdown

Online edition of India's National Newspaper
Sunday, Aug 08, 2004

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Business

Fears of global slowdown

LONDON. AUG. 7. The Global economy is `on a knife edge,' according to leading economists, as soaring oil prices, weak job figures in the United States and a potential housing crash on both sides of the Atlantic conspire to undermine business and consumer confidence.

As a result of crude oil prices reaching a record $44.77 in New York on Friday, a weaker-than-expected labour market and signs of pressure on corporate earnings, the Dow plunged several hundred points.

Anais Faraj, a stock market strategist at Nomura, said: `The FTSE 100 could end the year at 4,100 — a shade down from where it started in January.' At HSBC, economist Robert Prior said that interest rates were going up at a time when the market was already worried about a slowdown. `It's a double whammy,' he warned.

Some observers are predicting that Chancellor Gordon Brown will have to reduce his GDP estimates for next year.

The crude oil price was driven by concerns over tight supply, despite OPEC nations pumping at a 25-year high. Meanwhile, job creation in the U.S. faltered, with employers adding a mere 32,000 to payrolls in July — far lower than expected.

Ian Morris, a U.S. economist at HSBC, said: `The U.S. economy might tip over if the next labour market report were to be weak again.'

He said the Fed might take its foot off the pedal on rate increases, delaying any potential rise in August and possibly September. He believes that projections of 4 per cent growth in the U.S. into next year could be halved.

Julian Jessop, chief international economist at London consultancy Capital Economics, said low interest rates and high deficits in the U.S. had `papered over the cracks' of higher government spending and borrowing, the rising oil price and the spiralling property market: `It is right to be nervous. If you plug the numbers into an economic model, the impact on gross domestic product is manageable. The problem is that this does not allow for human nature. The risks of a crash have increased; the oil price could be the tipping point.'

U.S. Treasury Secretary John Snow said last week that high energy prices `make the recovery more difficult; it puts headwinds in the way of the recovery.' He added: `I don't think they're going to derail the economy, but they are a burden on it.'

However, the high prices, coupled with the news that the U.S. economy has grown far more slowly in the first two quarters than economists expected, has led to fears that it has not merely entered a soft patch but is threatening to go into reverse.

In Britain, retailers will this week renew demands for an end to interest rate rises as fresh data show shoppers are becoming more careful.

The authoritative British Retail Consortium sales monitor will report like-for-like growth falling back below June's rate of 2.4 per cent, continuing the downward trend since May.

The BRC's director general, Kevin Hawkins, warned that consumer spending in the shops is flagging. The shop price survey recorded deflation on the high street for the first time.

A spokesman said: `The problem is not in the shops, but that consumers are being spooked by the rate rises. They are getting more nervous. There is a lot of volatility around — and when demand is low anyway, factors like the weather become more important.'

July was wetter than last year and this hit summer fashions hard. Shoppers are picking up heavily discounted bargains in the sales, which will squeeze retail margins further.

— © Guardian Newspapers Limited 2004

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