16 August 2004
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.
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