Finance Blog number 1

The U.S. economy may already be in recession; other countries might not be far behind.

Japan, Britain, Spain and Singapore, which together represent about 12 percent of the world economy, are vulnerable as fallout from the U.S. worsens their economic weakness. Even emerging markets, including China, are likely to suffer as exports to the U.S. wane.

The result: Global growth may decelerate close to the 3 percent pace economists deem a worldwide recession, from a 4.7 percent rate in 2007. “Some form'' of global recession “is inevitable at some point,'' former Federal Reserve Chairman Alan Greenspan said in a speech in Vancouver last week.

The developing slump puts pressure on central bankers in Japan, the U.K. and the euro region to follow the lead of Fed Chairman Ben S. Bernanke, who last week accelerated interest- rate cuts in the U.S. with an emergency move to lower the benchmark rate by three-quarters of a percentage point. Policy makers may follow that with another cut of as much as half a point after a two-day meeting that starts tomorrow, futures trading indicates.

“The odds are shifting toward a more significant global monetary easing,'' says Richard Berner, co-head of global economics for Morgan Stanley in New York.

Jim O'Neill, chief economist at Goldman Sachs Group in London, says growth in the first half of 2008 may be the “weakest since 2002 and maybe even 2001,'' during the last global downturn. “The economy is slowing everywhere,'' he says.

Japanese Recession

It's “highly likely'' Japan is already in a recession or will enter one this quarter, Tetsufumi Yamakawa, chief Japan economist at Goldman in Tokyo, wrote in a report published today.

A worldwide recession doesn't require a global contraction in output, which rarely happens; economists at the International Monetary Fund say it would take a slowdown in global growth to 3 percent or less. By that measure, three periods since 1985 qualify: 1990-1993, 1998 and 2001-2002.

The contagion from the U.S., which according to the IMF represents about 21 percent of the global economy, is spreading via multiple channels. Less spending by American consumers and companies reduces demand for imported goods. The meltdown of the U.S. subprime-mortgage market has pushed up credit costs worldwide and forced European and Asian banks to write down billions of dollars in holdings. Tumbling U.S. stock prices are dragging down markets elsewhere.

“We'll see more collateral damage,'' says Allen Sinai, chief economist at Decision Economics in New York. “The risk of a global recession is rising.''

Catastrophe Improbable

Such a catastrophe, while increasingly possible, isn't yet probable, economists say. Sinai puts the odds at 20 percent. Nariman Behravesh, chief economist at Global Insight in Lexington, Massachusetts, reckons it's about 30 percent.

The global implications of a U.S. recession dominated discussions last week at the World Economic Forum in Davos, Switzerland. In Washington, the IMF postponed publication of its latest world economic forecast, originally due Jan. 25, to take into account recent market turbulence.

Japan's economy is particularly at risk. Its housing market is slumping as stricter building-permit rules drag home starts to a four-decade low.

A drop in construction demand led Tokyo Steel Manufacturing Co., the nation's biggest maker of steel girders, to lower its profit forecast Jan. 22.

Yen's Toll

“Japan is on the brink of a recession,'' says Hiroshi Shiraishi, an economist at Lehman Brothers Japan Ltd. in Tokyo. “Exports are supporting the economy, but with the U.S. slowdown they're likely to lose momentum.''

The yen's 13 percent rise versus the dollar in the last six months is also taking a toll. The Japanese currency reached a 2 1/2-year high of 104.97 to the dollar last week and traded at 106.72 at 11:44 a.m freecreditreport. in Tokyo. That is near the break-even point for Japan's exporters, who say they can remain profitable as long as the currency is weaker than 106.6, according to a government survey.

Kozo Yamamoto, head of the ruling Liberal Democratic Party's monetary policy panel, urged the Bank of Japan to cut its benchmark interest rate, already the lowest in the industrialized world at 0.5 percent.

“Concerns over a recession are emerging not only in the U.S., but in Japan as well,'' Yamamoto said in a Jan. 23 interview. “The BOJ should cut rates back to zero immediately.''

Credit Crunch

Singapore may already be in a recession. Its economy contracted for the first time in 4 1/2 years in the fourth quarter as factory output slowed and electronics exports dropped. The cooling local real estate market worsened the slowdown for financial services firms.

Housing is also slumping in the U.K., where loans for home purchases dropped to a two-year low last month. “The credit crunch moved into its fourth month in December,'' Michael Coogan, director general of the Council of Mortgage Lenders in London, said Jan. 21. “Lending volumes are likely to remain weak for the next few months.''

Retail sales fell in December by the most in 11 months. ScS Upholstery Plc, owner of 96 sofa stores in the U.K., said Jan. 14 that earnings will suffer after “disappointing'' December and January business.

The U.K.'s biggest nightclub owner, Luminar Group Holdings Plc, said Jan. 18 that sales growth slowed as Britons spent less on nights out.

“It's a gloomy picture for the consumer,'' says James Knightley, an economist at ING Financial Markets in London. “The prospect of recession is becoming more realistic.''

BOE Prediction

Retailers Tesco Plc and Marks & Spencer Plc this month called for interest-rate cuts to help consumers, who have 1.4 trillion pounds ($2.76 trillion) of debt. Economists surveyed by Bloomberg predict the Bank of England will lower its main rate a quarter percentage point, to 5.25 percent, on Feb. 7.

Spain is also grappling with a housing boom gone bust. Banco Bilbao Vizcaya Argentaria SA, Spain's No. 2 lender, predicts property prices will fall this year and building permits will drop 25 percent.

With more than 18 percent of gross domestic product coming from construction, Spain's economy is particularly susceptible to weakness in real estate.

“The main problem lies in construction but it has already spread to other sectors,'' says Gilles Moec, senior economist at Bank of America in London.

ECB's Inflation Fight

With other European countries, including Germany, showing signs of slowing, European Central Bank President Jean-Claude Trichet faces pressure to abandon his tough anti-inflation stance and cut interest rates. “We'll see rate cuts in the European Union and in the U.K. this year,'' Barclays Plc President Bob Diamond said Jan. 24 in Davos.

Hopes that China's fast-growing economy can take up the slack from a U.S.-led slowdown seem misplaced.

“If there is weakness in the world economy, the impact on the Chinese economy will be very serious,'' says Yu Yongding, director of the Chinese Academy of Social Sciences and a former adviser to the central bank.

China's growth slowed to a year-over-year pace of 11.2 percent in the fourth quarter, from 11.5 percent and 11.9 percent in the third and second quarters, respectively.

In Davos, Klaus Kleinfeld, chief operating officer of Alcoa Inc., the world's third-largest aluminum producer, said he foresees “a difficult year. I don't think the world can decouple itself from what's happening in the U.S.''

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South Korea's economy expanded faster than economists forecast in the fourth quarter, driven by the biggest increase in exports in four years and a pickup in business investment.

Growth accelerated to 1.5 percent from the third quarter's 1.3 percent, the central bank said in Seoul today. That beat the median estimate of 1.3 percent in a Bloomberg News survey of 14 economists. The economy advanced 5.5 percent from a year earlier, the fastest pace in almost two years.

South Korea's stocks and currency climbed as the report fanned confidence that rising shipments to China, eastern Europe and the Middle East will help Asian nations weather the U.S. slump. As global growth cools, the economy will be increasingly reliant on spending by businesses and consumers to extend its longest expansion in more than 15 years.

“The Chinese economy is supporting economic growth in Korea and across Asia as the U.S. slows,'' said George Worthington, chief Asia-Pacific economist at Thomson IFR in Sydney. The report also shows “quite a solid performance from the domestic economy,'' he said.

Deputy Finance Minister Cho Won Dong said today that the nation's increasing trade with China and Asia “will help us be less affected'' by a slump in the world's biggest economy.

The Kospi index climbed 1.8 percent to 1,692.41 at close of trading in Seoul, recording its first three-day advance in seven weeks and reducing this year's decline to 10.8 percent. The won rose 0.3 percent to 946.45 per U.S. dollar. The yield on the five-year government bond jumped 12 basis points to 5.30 percent.

China's Growth

China's economy expanded more than 11 percent for the fourth straight quarter, figures showed yesterday, supporting global growth as a recession looms in the U.S.

South Korea's exports surged 7.3 percent in the three months ended Dec. 31 from the previous quarter, the biggest increase since the fourth quarter of 2003, today's report showed.

Companies benefiting from higher global demand include LG Electronics Inc., Asia's second-largest mobile-phone maker, which yesterday posted a record quarterly profit.

Samsung Heavy Industries Co., the world's second-largest shipyard, today signed an agreement to build two drill ships for $1.3 billion. Shipyards in South Korea won about half of the global $187.3 billion in vessel orders last year.

Television Sales

Samsung Electronics Co., whose overseas sales account for 16 percent of South Korea's total exports, has tapped demand in China and India. Asia's largest electronics maker expects industry wide sales of liquid-crystal-display televisions globally will rise 30 percent in 2008 pay day loans.

“We are not satisfying demand from customers,'' Cho Yeong Duk, vice president of Samsung's LCD division, said on Jan. 15.

China surpassed the U.S. in 2003 to become South Korea's largest market, buying more than 21 percent of the nation's goods. Exports to China jumped 18 percent in the period from Jan. 1 to Dec. 20 and shipments to the Middle East surged 40 percent.

Goldman Sachs Group Inc. this month raised its forecast for South Korea's economic growth, predicting an expansion of 5 percent in 2008 compared with 4.9 percent last year.

Others aren't as optimistic.

UBS AG today cut its 2008 growth forecast to 3.6 percent, which would be the weakest in five years, saying both exports and consumption will slow. It previously estimated 4.1 percent.

`Growing Challenges'

South Korea's “challenges appear to be growing now we expect a U.S. recession,'' said Duncan Wooldridge, a Hong Kong- based economist at UBS. “Export growth should slow in line with weaker demand from the U.S., Europe, and Japan. And a slowdown in credit will lead to weaker domestic demand, especially consumption.''

Businesses are expanding to take advantage of global growth. Corporate investment in factories reversed the third quarter's drop and climbed 4.4 percent last quarter. Private consumption increased 1.1 percent last quarter, today's report showed, compared with a 1.2 percent gain in the previous three months.

The lowest jobless rate in five years and wage gains are underpinning consumer spending as fuel costs surge to a record.

“The issue now is how much the U.S. slowdown will hurt exports and economic growth, not whether we'll be affected,'' said Oh Suktae, an economist at Citibank Korea Inc. in Seoul. “Clearly, South Korea will have to rely more on the role of domestic demand.''

President-elect Lee Myung Bak aims to stoke growth by encouraging firms to invest more and increase hiring. He announced a series of tax breaks on capital expenditure and has proposed relaxing rules that limit investment in banks by industrial groups.

The government expects domestic demand will account for about 90 percent of its forecast 4.8 percent growth rate in 2008.

“The engine for economic growth this year will be corporate investment,'' said Kwon Goohoon, an economist at Goldman in Seoul. “Companies will spend if regulations are eased swiftly.''

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The nation’s largest brokerage firm, Merrill Lynch & Co., is expected to report losses of $15 billion stemming from soured mortgage investments, according to a published report Friday.
The New York Times, citing people who have been briefed on the broker’s plans, said the losses would come in nearly double its original estimate, prompting the firm to raise additional capital from outside investors. The losses are expected to be disclosed when the brokerage reports earnings next week, those people said. Among estimates on Wall Street, Merrill are expected to get as much as $10 billion from foreign governments, with Merrill Lynch expected to receive $3 billion to receive $3 billion to $4 billion, with much of the cash coming from a Middle Eastern government investment fund, the Wall Street Journal reported Thursday.
Both firms are rushing to finalize the deals before they report earnings next week, which will likely include further losses from exposure to mortgage-related securities, such as collateralized debt obligations.
Citi is also expected to consider slashing its dividend in half in a move that would save it around $2.5 billion a year, the newspaper reported.
Merrill is likely to write down the value of its CDO and subprime mortgage-backed security exposures by $10 billion next week, Bernstein Research estimated 24 hour payday advances. Such hits have increased concern that banks and brokerage firms may not be capitalized well enough and sent many companies in search of fresh cash.
“As long as Merrill’s fourth-quarter write-down comes in under $15 billion, the company would remain well capitalized,” Brad Hintz, an analyst at Bernstein, wrote a note to client on Thursday. “A $20 billion write-down this quarter or above would significantly increase leverage and would threaten the credit ratings of the firm.”

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The value of Metro Vancouver building permits dropped by a third in November, driven mostly by a big drop in filings for multi-family housing projects, Statistics Canada reported Thursday.

Builders were issued permits for $446 million worth of work in Metro Vancouver, compared with $669 million the month before.

In its report, Statistics Canada attributed the decline to a decrease in multi-family permit applications, which were down across the province almost 50 per cent from the previous month. November, however, was also a record month for new-home starts in Metro Vancouver, according to Canada Mortgage and Housing Corp.

Builders started work on 2,704 new units during the month on permits already issued.

Statistics Canada also reported that the value of new Metro Vancouver homes also crept up 0.2 per cent in November from October on its new-housing-price index, thanks largely to strong market conditions in the Lower Mainland payday advance.

To the end of November, Vancouver’s new-housing-price index had increased 6.4 per cent.

To the end of November, Metro Vancouver builders had taken out $6.45 billion worth of building permits, a 4.7 per cent increase from the first 11 months of 2006.

Provincewide builders took out a total of $901 million worth of building permits in November, a 20 per cent decline from October, with a 6.5 per cent increase in non-residential permits to $290.5 million, offsetting some of the residential decline.

To the end of November, municipalities had issued $11.5 billion worth of building permits, a 7.1-per-cent increase from the first 11 months of 2006.

The Bush administration is working to combat the country’s severe housing crisis but there is no simple solution, Treasury Secretary Henry Paulson said Monday, adding that a correction in the housing market is “inevitable and necessary.”

Paulson said the country was facing an unprecedented wave of 1.8 million subprime mortgages that are scheduled to reset to sharply higher rates over the next two years. He said this raised the threat of a market failure and was the reason the administration brokered a deal with the mortgage industry to freeze certain subprime mortgage rates for five years to allow the housing market to recover.

“By preventing avoidable foreclosures, we will safeguard neighborhoods and communities and fulfill our responsibility of protecting the broader U.S. economy,” Paulson said in a speech in New York. “However, let me be clear: There is no single or simple solution that will undo the excesses of the last few years.”

Paulson said that the deal the administration brokered with the industry to freeze certain subprime mortgage rates for five years did not involve the use of any taxpayer money. Conservative critics have complained that the administration’s plan represented government intrusion in the operation of markets that would end up rewarding some people who had taken out risky mortgages.

In his speech, Paulson raised the possibility that some sort of “systematic approach” might need to be developed to help homeowners with other types of adjustable-rate mortgages that are resetting to higher rates http://payday-faxless.com. The current plan only involves subprime mortgages, loans offered to borrowers with weak credit histories.

The steep slump in housing has been a serious drag on the overall economy. There are rising fears that the country could topple into a recession. Those worries were heightened after a report Friday showing that the unemployment rate jumped to a two-year high of 5 percent in December with job growth slowing to a crawl.

Paulson called the current housing correction inevitable after what occurred during the five-year boom in which sales and prices climbed to record levels.

“After years of unsustainable price appreciation and lax lending practices, a housing correction is inevitable and necessary,” Paulson said.

He said that the correction was taking a toll on the economy that would continue for a period of months.

“It will take additional time for markets to regain confidence,” Paulson said. “The overhang of unsold homes will contribute to a prolonged adjustment and poses by far the biggest downside risk.”
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