World financial news

Japan's government acknowledged for the first time that the country's longest postwar period of growth has probably ended.

The economy is “deteriorating,'' the Cabinet Office said today in Tokyo in an assessment based on a drop in the coincident index, the government's broadest indicator of economic health. In April and May the government said the economy had “probably peaked.''

Although the economy has yet to contract for two straight quarters — one definition of a recession — falling exports and soaring energy and material costs have squeezed profits, compelling companies to cut production, investment and hiring.

“The signs of a recession are already there,'' said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo, citing two quarters of falling factory output and a jobless rate that jumped to 4.1 percent in June from 3.8 percent in March.

The coincident index fell to 101.7 in June from 103.3.

A three-month moving-average of the index, a composite of statistics including production and the ratio of jobs to applicants, fell for a fourth month in June to 102.2 from 102.5.

The Cabinet Office can declare the economy has worsened if the index has fallen for one month and the three-month moving- average has declined for three or more months.

Prime Minister Yasuo Fukuda last week replaced his economic ministers in a bid to boost his popularity, which has plummeted amid rising food and gas prices and a 16 percent slide in the Nikkei 225 Stock Average this year.

Finance Minister Bunmei Ibuki said yesterday the economy is at risk of falling into a state of stagflation, a combination of slowing growth and spiraling prices. Economic and Fiscal Policy Minister Kaoru Yosano said on Aug. 4 that he plans to announce measures this month to help consumers and companies cope with rising energy costs pay day loans.

Falling Exports

The spillover from the U.S. slowdown is starting to exert a drag on Europe and Asia, markets where Japanese companies make about three-quarters of their overseas sales. Exports fell for the first time in more than four years in June. Record oil costs and the yen's 3.6 percent gain against the dollar this year have cut into margins, making each sale less profitable.

Sony Corp., Japan's second-largest consumer-electronics maker, last month cut its earnings forecast for the year ending March 2009. Chief Executive Officer Howard Stringer said the company's sales growth in the U.S. and Europe would probably slow and demand from China looked set to falter.

Still, economists say the current slowdown is likely to be moderate relative to past recessions because companies have shed excess capacity and expanded sales in emerging markets.

“Compared with the sharp slowdown in the U.S. or with Japan's recessions in 2001 or 1998, the atmosphere shouldn't be that gloomy,'' said RBS's Nishioka. “It'll be bad, but it's not as though jobs are just going to vanish.''

The Bank of Japan's most recent business survey showed labor demand is close to a 16-year high. The jobs-to-applicants ratio was at 0.91 in June, meaning almost every person who wants a job can get one. During the previous recession in 2001, there were two applicants competing for every position.

“The economy is still in relatively good shape compared to similar points in previous downturns,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. “If there is a recession, we expect it to be relatively shallow and short-lived.''

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Employers in the U.S. fired workers in July for a seventh straight month and cut hours for remaining staff to a record low, signaling economic growth weakened at the start of the second half of the year.

Americans labored an average 33 hours and 36 minutes per week, six minutes less than in June and matching the shortest workweek since records began in 1964, the Labor Department said today in Washington.

Combined with the drop in payrolls, the total number of hours worked in July declined by 0.4 percent, indicating the economy took a turn for the worse entering the third quarter. Businesses are broadening efforts to trim labor expenses as surging fuel bills hurt profits.

“Companies have already cut the fat and some muscle, and are now trimming hours,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. The drop in hours “is going to have a huge impact'' on growth.

Private employers cut 76,000 jobs in July while government hiring increased by 25,000. That brought the decline in total payrolls to 51,000, spanning transportation companies, retailers, manufacturers and temporary help agencies.

In terms of the impact on gross domestic product, every tenth of an hour drop in the workweek is equivalent to a loss of 300,000 to 350,000 jobs, LaVorgna estimated. He cut his third- quarter growth estimate to 0.7 percent at an annual rate, less than half his prior projection of 1.5 percent.

`Case' for Recession

“The decline in hours worked has a suggestion of more job losses to come,'' said John Ryding, chief economist at RDQ Economics LLC in New York payday advance lenders. The report “adds to the case that the U.S. is in recession.''

The economy grew at a 1.9 percent annual pace from April through June, less than economists anticipated, figures from the Commerce Department yesterday showed. Revised estimates also showed GDP shrank at the end of 2007. Some economists said this indicated the U.S. slipped into a recession late last year.

One reason for the drop in the workweek may be a jump in part-time employment. The number of Americans having to work fewer hours because they couldn't find full-time jobs as the economy weakened jumped by 308,000 to 5.7 million in July, the most since December 1993. The figure has grown by 1.4 million in the past 12 months, today's report showed.

General Motors Corp., the largest U.S. automaker, on July 28 said it'll eliminate shifts at two truck plants and slow output at two others under a plan to build fewer vehicles as U.S. sales decline.

“As costs go up, companies are driven to cutting back on the number of hours of work they're paying for, even if they're not cutting the actual number of workers,'' said Stephen Gallagher, chief U.S. economist at Societe Generale in New York. “I'd look for restraint in output this quarter.''

The average workweek has been drifting down in the last five decades as businesses attempt to increase efficiency, Labor figures show.

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Thailand's inflation accelerated to the fastest pace in a decade in July, suggesting the central bank may increase borrowing costs further to cool prices even as economic growth cools.

Consumer prices gained 9.2 percent from a year earlier, the Commerce Ministry said today in Bangkok. The rate was the highest since July 1998 and compares with the 9.3 percent median estimate of 16 economists in a Bloomberg News survey. The pace was 8.9 percent in June.

Surging oil and food costs may prompt Thailand's central bank to raise its benchmark interest rate for the second time in as many months when policy makers next meet on Aug. 27. Growth in Southeast Asia's second-largest economy is slowing amid legal challenges to the government that are sapping confidence.

“Fighting inflation should take priority over cushioning demand,'' said George Worthington, chief Asia-Pacific economist at Thomson IFR in Sydney. “Once inflation gets loose, it is far harder to bring it down than to cope with a few quarters of slower demand growth.''

Core inflation, which excludes fresh food and fuel prices, accelerated to 3.7 percent in July, the Commerce Ministry said today. The pace, which exceeded for a second month the 3.5 percent ceiling used by central bank policy makers to help set monetary policy, compares with the 4 percent expected by economists.

`Containing Inflation'

Rather than maintaining the interest rate at the current level, “the appropriate monetary policy will help contain inflation expectations,'' the central bank said on July 28 payday advance.

The Bank of Thailand on July 16 raised its one-day bond repurchase rate by a quarter percentage point to 3.50 percent, the first increase in two years, saying it may raise it further to cool inflation.

Adjusted for the pace of price increases, real deposit and lending rates are negative and bad for the economy because they don't encourage saving, Governor Tarisa Watanagase said July 24.

Prime Minister Samak Sundaravej plans to overhaul his cabinet this week to calm anti-government protesters who say he is a stand-in for former Premier Thaksin Shinawatra, deposed in a 2006 coup. Consumer confidence has fallen for three months to its lowest level this year, the SET Index has lost 23 percent since protests began May 25, and the baht has sunk 4.5 percent.

“Politics will remain an overhang for at least this year,'' said Kobsidthi Silpachai, head of capital markets research at Kasikornbank Pcl in Bangkok. “It will depress the economy.''

The $206 billion economy may expand between 4.8 percent and 5.8 percent in 2008, the central bank predicted on July 28, citing the effects of higher prices squeezing disposable incomes. The bank previously forecast gross domestic product would grow as much as 6 percent this year.

Thailand imports almost all of its crude oil, the price of which is about 60 percent higher than a year ago.

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