Business Blog Posts

At the start of 2011, growth looked solid. The U.S. unemployment rate was finally dropping, consumers were in a spending mood, and economists were busily upgrading first-quarter growth projections to the range of 4 percent.

Those forecasts are falling fast. Many economists now think the U.S. economy grew at a sluggish 1.5 percent to 2 percent pace over the first three months of the year, and one forecaster even raised the possibility of a negative reading.

Whether this is a short-lived blip or a more worrisome dip depends largely on which way oil prices move, and how consumers and businesses around the world respond.

Goldman Sachs economist Andrew Tilton said downside risk was "unfortunately a phrase we have been using a lot lately."

A quiet week for economic data probably won't bring much, if any, good news. The highlights include a clutch of U.S. housing reports, which will serve as yet another reminder that the real estate slump persists.

Emerging markets have been the strongest global growth engine, giving advanced economies an export boost. But rising inflation pressures mean many countries will be clamping down on credit conditions, which would curb growth. Barclays Capital called inflation the "predominant risk" facing China.

GLASS HALF FULL

As for the United States, Barclays cut its first-quarter growth forecast to a rate of 2 percent from 3.5 percent, not quite as gloomy a forecast as some other Wall Street banks have published.

But Barclays economist Michael Gapen said the forces holding back first-quarter growth would likely prove "temporary" and the firm raised its second-quarter growth forecast -- a rarity these days.

Gapen said economic measures such as industrial production and employment "have all been moving in a way that is consistent with strong, not weak, economic growth."

American consumers have kept up spending on durable goods, including buying autos which should be sensitive to rising oil prices, and that bodes well for growth, Gapen said.

The flip side of that argument is that consumer confidence faded as oil and gasoline prices spiked, and if that translates into slower consumption the economy will suffer. Consumer spending accounts for some 70 percent of the U.S. economy.

"The extra cost of about 70 cents per gallon, relative to prices at the end of 2010, is siphoning off household income at a run rate equivalent to $100 billion per year -- income that otherwise could have been spent on other goods and services," Goldman's Tilton said.

His firm is still forecasting that consumer spending will pick up in the second quarter, but he said that "will require a fortuitous combination of circumstances."

The reserve rate rise, which followed an increase in benchmark bank interest rates on April 5, was the seventh since China stepped up efforts against inflation in October and underscored the government's determination to keep the economy on an even keel.

The move was not a surprise -- investors predicted more tightening after last week's data showed an acceleration in inflation, and more worryingly, sustained capital inflows that threaten to keep inflationary pressure high.

"This rise continues the tightening measures of the central bank," said Lin Songli, an economist with Guosen Securities in Beijing. "The first-quarter GDP shows that the whole economy is good, so there is still space for tightening."

The central bank has also raised interest rates four times since October, slapped price control measures on certain commodities, and clamped down on property speculation.

But price pressures driven by soaring global commodity prices and abundant liquidity continue to plague the Chinese economy.

Central bank chief Zhou Xiaochuan said on Saturday that policy tightening will continue for sometime, as inflation is higher that the government is comfortable with.

And last week, Premier Wen Jiabao signaled a hawkish stance for the coming months, saying that the government would use all tools at its disposal to wrestle inflation under control.

The 50-basis-point increase, effective from April 21, lifted the required reserve ratio for the country's biggest banks to a record 20.5 percent. It will lock up about 350 billion yuan ($53.6 billion) of cash that banks would otherwise be able to lend.

MORE TIGHTENING AHEAD

The latest economic data showed China's turbo-charged economic growth barely slowed in the first quarter, giving the government more confidence to press ahead with policy tightening.

"I think there will be more required reserves hikes in the coming months, or even this month, but the possibility of an interest rate rise this month is not that big," said Zhu Jianfang, chief economist at Citic Securities in Beijing.

The latest Reuters poll conducted on April 6 showed analysts believe the central bank will raise banks' required reserves three times this year by a total of 150 basis points and increase interest rates just once more this year.

But although economists have argued recently that the central bank was near the end of its interest rate tightening cycle, China's economic growth is still cruising near double digits and the scope for China's government to continue tightening may be bigger than previously anticipated.

"The inflation picture is still worrisome and bank lending rebounded in March," said Zhao Xijun, economist at Renmin University in Beijing. "I think the central bank will raise interest rate in the coming weeks -- probably in June."

WORLD BANK PRESIDENT ROBERT ZOELLICK

ON RISING FOOD PRICES

"Of particular concern is food prices. This is the biggest threat today to the world's poor, where we risk losing a generation. ... Already 44 million people have fallen into poverty as a result of rising food prices over the last year. We estimate that a further 10 percent rise in the food price index could push 10 million more people into poverty."

ON THE MIDDLE EAST

"Policy will be as important as money. We must act now. Waiting for the situation to stabilize will mean lost opportunities. In revolutionary moments, the status quo is not a winning hand."

MEXICAN CENTRAL BANK GOVERNOR AUGUSTIN CARSTENS

(in interview with Reuters)

ON IMPACT OF U.S. SOFTNESS

"The indicator to which Mexico has a closer correlation is industrial production. And as the recent figures show, industrial production in the U.S. is performing relatively well. So even though I acknowledge that there have been some mixed figures about the U.S. economy, we still are optimistic about the evolution of the Mexican economy."

ON RISING ENERGY COSTS

"The pricing rule that Mexico follows for gasoline sort of eliminates some of the volatility from our CPI so that's one advantage that we have. But especially in grains and other food items volatility is very important for us because food is a very high component of our CPI."

ON RATES OUTLOOK

"We are following a very cautious approach. If we see that commodity prices are not only having a one-off impact on CPI but is affecting in a more fundamental way the dynamics of price setting in Mexico and is also feeding into inflationary expectations, at that point we might decide to adjust our monetary policy stance."

GREEK FINANCE MINISTER GEORGE PAPACONSTANTINOU:

ON RECOVERY:

The steering committee of the International Monetary Fund, comprised of finance officials from around the world, addressed the increasingly contentious issue as emerging markets grapple with an inflationary inflow of "hot money" that they blame on low interest rates in the United States and other advanced economies.

"Giving due regard to country-specific circumstances and the benefits of financial integration, such an approach should encompass recommendations for both policies that give rise to outward capital flows and the management of inflows," the panel of IMF member nations said in a communiqué.

The IMF this month endorsed use of capital controls, a tool once considered anathema to its free-market philosophy, but advanced countries want to establish a framework to monitor the policies governments use, an approach emerging markets oppose.

"Ironically, some of the countries that are responsible for the deepest crisis since the Great Depression and have yet to solve their own problems are eager to prescribe codes of conduct to the rest of the world," Brazilian Finance Minister Guido Mantega said, "including to countries that are overburdened by the spillover effects of the policies adopted by them."

Brazil, which has one of the highest official interest rates at 11.75 percent, is among emerging economies that have taken repeated steps to try and curb large inflows of money. But the need to also combat rising inflation has complicated the problem, with central bank rate hikes designed to cool growth feeding the inflows of capital.

Brazil and others point at the U.S. Federal Reserve's zero interest rate policy, which they say leads investors to pour money into their economies in search of higher returns.

Singapore Finance Minister Tharman Shanmugaratnam, the chairman of the IMF steering committee, said the problem was not just not just an emerging market phenomenon but also a "global inflation and interest rate problem."

The steering committee said the global economy was strengthening but that policy action was needed given "significant risks" threatening the recovery.

"Credible actions are needed to accelerate progress in addressing challenges to financial stability and sovereign debt sustainability, and to ensure timely fiscal consolidation in advanced economies," it said.

It also called for further work toward widening the basket of currencies that compose the fund's accounting unit, the Special Drawing Right.

Leading world economies have been working on a plan to include the Chinese yuan in the SDR basket, but progress has been slow. That's partly because of China's policy of keeping the yuan on a tight leash. SDR currencies are supposed to be "freely usable."

PUTTING FISCAL HOUSES IN ORDER

Some finance officials said ultra-loose monetary policies and rising budget deficits in the United States and other advanced countries pose a threat to the world's recovery from the worst recession since World War Two.

"The fiscal situation in the advanced economies gives us great concern, and it is in this area that we see the major risks to the global economy," Russian Finance Minister Alexei Kudrin told the IMF's advisory panel.

Resistance to limiting capital controls, a sensitive topic for economies inundated with inflows of inflationary "hot money" from countries with low interest rates such as the United States, was widespread among emerging market finance leaders at a weekend International Monetary Fund meeting here.

"We oppose any guidelines, frameworks or 'codes of conduct' that attempt to constrain, directly or indirectly, policy responses of countries facing surges in volatile capital inflows," said Brazilian Finance Minister Guido Mantega.

The IMF this month endorsed use of capital controls, a tool once considered anathema to its free-market philosophy, but advanced countries want to establish a framework to monitor the policies governments use, an approach emerging markets oppose.

"Ironically, some of the countries that are responsible for the deepest crisis since the Great Depression and have yet to solve their own problems are eager to prescribe codes of conduct to the rest of the world," Mantega said, "including to countries that are overburdened by the spillover effects of the policies adopted by them."

Brazil and others point at the U.S. Federal Reserve's zero interest rate policy, which they say leads investors to pour money into their economies in search of higher returns. These flows are stoking inflation and pushing currencies higher in emerging markets.

The G24 group of developing nations, which includes Brazil and India, urged the IMF on Thursday to take an "open-minded and even-handed approach" to managing capital inflows.

The fund should focus on understanding the effects of "policies that spill across borders," Central Bank of Chile Governor Jose De Gregorio said on Saturday.

The G20 group of leading developed and emerging economies delayed a final decision on when countries can use capital controls on Friday and agreed to keep working on a framework.

But French Finance Minister Christine Lagarde, whose country is G20 president this year, said "it seems vital to have a common set of rules" on how to manage capital flows.

Mexican Finance Minister Ernesto Cordero said capital controls "should only be used as a last resort."

"Thankfully, there are only a few countries considering these measures," he said.

PUTTING FISCAL HOUSES IN ORDER

Some finance officials said ultra-loose monetary policies and rising budget deficits in the United States and other advanced countries posed a threat to the world's recovery from the worst recession since World War II.

"The fiscal situation in the advanced economies gives us great concern, and it is in this area that we see the major risks to the global economy," Russian Finance Minister Alexei Kudrin told the IMF's advisory panel.