WCA July 2008

company by market value, posted a 12% drop in earnings and said that its profit had fallen for the first time since 2003. Taken together, the reports validate concern among Federal Reserve officials that the economy will shrink in the first half of the year.Courtney Schlisserman of Bloomberg News summed up the pocketbook issues that are suddenly striking home: “Americans are confronting the loss of 232,000 jobs so far this year, along with higher food and energy costs and overall weakening in the economy. Consumer spend- ing in the first half will advance at the weakest rate in 17 years, according to economists surveyed by Bloomberg .” (“US Economy: Consumer Sentiment Drops to 26-Year Low,” 11 th April) Again according to the forecast of economists reporting to Bloomberg News , consumer spending will rise at an average annual pace of only 0.5% in the first half of the year. That would be the smallest six-month gain since purchases fell in the half-year ended March 1991. In its most recent report on orders to US factories, the Commerce Department said on 2 nd April that these orders dropped 1.3% in February, about double what economists had been expecting. In January, orders had fallen by an even larger 2.3%, the largest decline in five months. The worsening picture reinforced worries about recession in the American economy. Two consecutive quarters of decline in total output is the generally accepted sign of a recession. The falling-off in demand was steep and widespread. February orders for heavy machinery plunged 12.3%, the biggest drop since January 2004. Orders for iron and steel fell 2.3%. Orders for motor vehicles fell 2% after no gain in January. American auto makers are struggling with weak demandin the face of soaring gasoline prices and the broad slump in the economy. The weakness in manufacturing occurred despite a 5.1% rise in orders for commercial aircraft in February, rebounding from a big decline in January. Overall, orders for transportation products posted a 1.8% rise in February on the strength of commercial and military aircraft orders, as well as higher demand for ships. On the day the Commerce report was issued, Chairman Ben S Bernanke of the Federal Reserve gave the Joint Economic Committee of Congress his most pessimistic assessment to that point. He said, “It now appears likely that gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly.” Demand for aircraft does not offset a steep drop in factory orders

Deriving a new pessimism from the US housing recession, credit-market turmoil, commodity prices, and inflation pressures, they darkened their outlook from that of only two months earlier. Particularly worrisome to the G-7 officials was the increased volatility of the dollar vis-à-vis the euro (an 8% loss) and the yen (a 6% loss) over the short period. Their statement read, “Since our last meeting [in Tokyo, in February], there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability.” The finance chiefs spelled out the most worrisome of those implications: a worldwide economic slowdown, worsening amid a stubborn credit squeeze: “The turmoil in global financial markets remains entrenched and more protracted than we had anticipated. Near-term global economic prospects have weakened.” The G-7 officials met in the same week that the International Monetary Fund estimated a 25% chance of a global recession this year. A collapse in the market for US subprime mortgages has pushed the US toward its first contraction in seven years and prompted banks to shun lending after $245 billion of asset writedowns and credit losses since the beginning of 2007. While the shrinkage of the dollar has helped the US economy by boosting exports, its acceleration drew criticism from officials of countries worried about their own export trade. This attitude was summed up by Canada’s finance minister Jim Flaherty, who told reporters in Washington that the pain of the dollar’s drop “has been borne primarily by the Canadian dollar and also by the euro and the yen.” Composed of the US, Japan, Germany, France, Italy, the UK and Canada, the G-7 oversees two-thirds of the world economy. th April, the eve of the G-7 meeting in Washington, the currencies of the US and China reached a milestone in their recent relationship. For the first time in more than a decade, the dollar bought less than 7 yuan, a ratio tending to make Chinese-made goods more expensive for American consumers and possibly contribute to inflation in the United States. The gains for the yuan have followed Beijing’s decision, in July 2005, to end a longstanding peg to the dollar. It was lifted in response to complaints by Americans and Europeans that the yuan was set artificially low, awarding Chinese exporters an unfair trade advantage from the artificially low price of their goods. The ironic result, in the view of many observers, has been massive trade surpluses for China and job losses in the US and Europe. On 10 ❖ ❖

Currency swings

The G-7 is gravely concerned by the weakness of the US dollar After talks in Washington on 11 th April, the finance ministers and central bankers of the Group of Seven industrialised nations issued a bleak statement on the world economy.

Dorothy Fabian Features Editor

24

Wire & Cable ASIA – July/August 2008