NEWS,18.07.2013

China's growth must be sustained - IMF

China needs another round of "decisive measures" to make sure it continues its successful economic growth as its margins of safety are falling amid growing domestic problems, the International Monetary Fund said in its latest report.
The world's second largest economy has been underpinned by a mix of investment, credit and fiscal stimulus, but such a pattern of growth is unsustainable, the fund said in a report on its annual Article 4 meeting with Chinese officials.
"To secure more balanced and sustainable growth, a package of reforms is needed to contain the growing risks while transitioning the economy to a more consumer-based, inclusive, and environmentally-friendly growth path," the report said.
"While China still has significant buffers to weather shocks, the margins of safety are diminishing."
The IMF didn't change its latest forecast for 2013 growth in China of 7.75%, though it noted downside risks to the forecast. Its figure is above the Chinese government's target of 7.5% and also above most private economists' forecasts of between 7% and 7.5%.
China's new leaders have repeatedly indicated that they are prepared to tolerate slower growth to push through reforms and deregulation to wean the economy off a reliance on exports and investment and encourage more consumption.
That resolve has been tested, however, as growth slowed in the April to June quarter to 7.5%, the ninth quarter in the last 10 that expansion has weakened, and exports fell in June for the first time in 17 months.
Analysts have suggested that the government may step in if growth falls to 7% or below in any quarter, though it is unclear where the government's bottom line would lie.
The IMF said that for the near term, a priority is to rein in broader credit growth and prevent a further build up of risks in the financial sector.
It noted the rise of China's shadow banking system, where credit is available outside regular channels to companies that banks won't lend to, but which risks creating piles of hidden bad debts that become a threat to financial stability.
Banks could be vulnerable in future if asset qualities should worsen. The significant expansion of local government debt levels in recent years is another cause for concern.
The IMF said China's agenda should include accelerated financial sector reforms, a revamp of local government finances, a more market-based currency exchange rate with less intervention, opening more markets to competition and liberalising the capital account.
"With a successful transition, China will grow at a healthy pace for years to come," the report said.
"Activity may be somewhat slower, a trade off worth making for the benefit of much higher income in the medium to long run - a growth trajectory that will also be good for the global economy."

Bernanke: Fed flexible on bond buying

Federal Reserve chairperson Ben Bernanke said on Wednesday the US central bank still expects to start scaling back its massive bond purchase programme later this year, but he left open the option of changing that plan if the economic outlook shifted.
While sticking closely to a timeline to wind down the bond buying that he first outlined last month, Bernanke went out of his way to stress that nothing was set in stone.
"Our asset purchases depend on economic and financial developments, but they are by no means on a preset course," he told the House of Representatives Financial Services Committee.
Under the plan Bernanke laid out on June 19, the US central bank would likely reduce its monthly bond buys later this year and halt them altogether by mid-2014, as long as the economic recovery unfolds as expected.
He did not depart from that guidance on Wednesday, but he said the current $85 billion monthly pace of purchases could be reduced "somewhat more quickly" if economic conditions improved faster than expected. On the other hand, it "could be maintained for longer" if the labor market outlook darkened, or inflation did not appear to be rising toward the Fed's 2% goal.
"Indeed, if needed, the (Fed's policy) committee would be prepared to employ all its tools, including an increase (in) the pace of purchases for a time, to promote a return to maximum employment in a context of price stability," Bernanke said.
The remarks lifted US stock prices modestly and government debt prices also rose. The dollar firmed against the euro and the yen.
"There is something in these comments for everybody," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "Bernanke has done a good job of leaving himself plenty of maneuver room in terms of policy."
Bernanke's testimony to Congress on the Fed's semi-anual monetary policy report may be his last if he steps down when his term as chairman ends in January, as many expect, and a number of lawmakers lauded him for his service.
Under Bernanke, the Fed has held overnight interest rates near zero since December 2008 and more than tripled its balance sheet to about $3.46 trillion with bond purchases aimed at driving down longer-term borrowing costs and spurring investment and hiring.
Calming the waters
Bernanke set off a brief but fierce global market sell-off last month when he outlined the Fed's plans to curtail its so-called quantitative easing, and he has joined a slew of officials since then who have spelled out their intention to keep rates near zero well after the bond buying ends.
Bernanke acknowledged that one of his motives in talking about tapering last month had been to head off a possible bubble in financial markets. Many economists had suspected that had been an important reason.
"Not speaking about these issues would have risked a dislocation, a moving of market expectations away from the expectations of the (Fed's policy) committee. It would have risked increased build-up of leverage or excessively risky positions in the market," he said.
While the end of the Fed's bond buying may be in view, Bernanke repeated that officials will keep rates near zero at least until the jobless rate, which stood at 7.6% in June, falls to 6.5%, as long as inflation remains in check.
He also said the Fed would look closely at any decline in unemployment to see whether it was being driven by strength in hiring or a decline in the number of Americans looking for work, in which case the central bank would be more patient before raising rates.
Any rate hike cycle, he said, would be gradual.
"We intend to be very responsive to incoming data, both in terms of our asset purchases - but it's also important to understand that our overall policy, including our rate policy, is going to remain highly accommodative," Bernanke said.
The testimony led traders in futures markets to push back their expectations for when rates will rise to December 2014 from as early October 2014 a day earlier. The Fed said last month that 14 of its 19 policymakers do not believe it would be appropriate to raise rates until sometime in 2015.
As for bond purchases, economists on Wall Street expect the Fed to start reducing them at its meeting in September.
Speaking about the Fed's bloated balance sheet, Bernanke suggested the central bank would hold the government bonds it has bought for a long time, if not to maturity, and reinvest any proceeds to keep its balance sheet from shrinking quickly.
Recovering at a modest pace
Some Fed officials have been concerned about the low level of inflation and have expressed a hesitance to trim bond purchases until inflation quickens. The central bank's preferred price gauge is a full percentage point below its target.
Bernanke repeated his view that transitory factors appeared to be restraining price gains, although he said policymakers were aware that very low inflation raised the risk of an outright deflation, which could sap the economy's strength.
Data on Tuesday showed that inflation firmed last month, and hiring in recent months has been relatively strong.
However, the government said on Wednesday groundbreaking for homes fell to a 10-month low. In addition, retail sales were weak in June, and second-quarter GDP growth is expected to come in at around a dismal 1% annual rate, painting a very mixed picture for Fed policymakers.
Bernanke, who appears for a second day of testimony before the Senate Banking Committee on Thursday, said the economic recovery was continuing at a moderate pace thanks to a generally stronger housing sector, which was helping conditions in the labor market improve gradually.
He also repeated that the Fed felt the risks to the economy had decreased since the fall.
But he said higher taxes and cuts in federal spending could exert a larger drag on growth than expected, and that worsening conditions overseas could hurt conditions back home.
"With the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated," Bernanke said.

Bernanke hearing turns into 'eulogy'

With a smile periodically playing across his face, Ben Bernanke almost looked pleased to face questions from members of the US House of Representatives on Wednesday, but that might be because he knows that it was for the last time.
During a hearing described several times as more like a eulogy than testimony on monetary policy, the Federal Reserve chief received bi-partisan thanks for his service as successive members said they had heard he may not be in the job next year.
Bernanke has kept silent about his future plans, but he is widely expected to depart when his current term as Fed chairperson expires on January 31. Nor has he pushed back against perceptions that he is ready to return to private life.
That impression was reinforced last month by President Barack Obama, who said Bernanke had already stayed in office "a lot longer than he wanted".
"I feel a little bit like Bette Midler, the very last guest on the very last episode of The Tonight Show that Johnny Carson hosted. She famously quipped to Carson, 'You are the wind beneath my wings," said Washington state Democrat Denny Heck.
"There's some application to that ... as it relates to the economy and I thank you for your service," he said.
Another Democrat, Al Green from Texas, pleaded with him not to go, while it was suggested that T-shirts for his retirement party be printed with the logo "$34 trillion" to celebrate the amount of US household wealth restored on his watch.
Democrats have been staunch supporters of Bernanke, even though he is a Republican originally appointed by former president George Bush. Obama tapped the one-time Princeton professor for a second four-year term in 2009, thanking him for his aggressive efforts to combat the deep 2007-09 recession and virulent financial crisis.
The Bernanke-led Fed cut overnight interest rates to near zero in late 2008 and launched an unconventional policy of buying longer-term government and mortgage-backed debt to drive other borrowing costs lower.
Many Republicans privately blame Bernanke for helping Obama get re-elected in 2012 and have been outspoken public critics of the aggressive policies he has championed.
Some Republicans repeated their complaints on Wednesday, but they also spent time warmly acknowledging his service, while noting this could be his last appearance before the House.
Indeed, the atmosphere in the crowded hearing room was a great deal lighter than during the dark days of the financial crisis when Bernanke had to endure a heavy barrage of critiques, and the Fed chief looked more at ease.
One lawmaker asked him if now would be a good time for a friend to refinance his mortgage. Bernanke cheerfully responded: "I am not a qualified financial adviser."
However, there were moments when he looked as if he might be relieved he would not have to endure long-winded congressional hearings for much longer, although he does address the Senate banking panel on Thursday.
His smile thinned when committee chairperson Jeb Hensarling, a Texas Republican, announced three hours into the hearing that Bernanke would have to sit through another 10 minutes of questioning.
And he slumped visibly, head on hand, as he listened to Michele Bachmann, a Republican from Minnesota, wonder aloud whether the US Treasury was cooking the books on the federal budget, before politely deflecting her question.
Likewise, his final words to the committee, in response to a question from New Mexico Republican Steve Pearce about whether there was a level of immigration into the United States that could hurt the economy, sounded unapologetically dismissive: "I don't know."

NEWS,01.02.2013

Daimler boosts stake in China

German automaker Daimler unveiled plans Friday to boost its position in the fast-growing Chinese market by acquiring a 12% stake in the country's fifth-biggest car group.Daimler, which at the end of last year created a new position on its management board dedicated especially to China, said in a statement it had decided to deepen its existing partnership with Beijing Automotive Group (BAIC) by buying a stake in its passenger car unit BAIC Motor.BAIC is planning to float the subsidiary on the stock exchange and when it does so, Daimler would buy a stake of 12%, the German group said.As part of the agreement, Daimler would receive two seats on the BAIC Motor's board of directors.At the same time, the two sides would increase their stakes in existing joint ventures, they said.BAIC's holding in the production joint venture Beijing Benz Automotive Company (BBAC) would rise to 51 percent from 50 percent, while Daimler's stake in the integrated sales joint venture Beijing Mercedes-Benz Sales Service would be increased to 51 percent.Financial details were not disclosed. But Daimler and BAIC expect the deal  which still has to be approved by the relevant authorities -- would be closed "by the end of this year or early next year.""Following our technical cooperation with BAIC Motor and the setup of our integrated sales company, we are now taking the next step in deepening our relationship even further," said Daimler chief executive Dieter Zetsche."Our investment is a strong sign of the increased level of trust and cooperation between our two companies and clearly emphasises the long-term commitment to a joint successful future of our two companies," he said.BAIC chairman Xu Heyi said the partnership "has entered into its best phase ever, with further deepened cooperation in accordance with the mutual interests and development plans between both companies."Daimler's acquisition of a 12% stake "will go a long way in accelerating the development of BAIC's self-owned brand in terms of capital, technology, management, and brand. At the same time, this will help Mercedes-Benz to boost its business performance in China," Xu said.NordLB analyst Frank Schwope put the estimated price tag of the deal at €640m.He said Daimler has long been trailing rivals BMW and Audi, a unit of Volkswagen, in China, which is the world's most important market in terms of growth outlook.In 2012, Daimler, which employs more than 2 000 people in China, sold around 210 000 of its Mercedes-Benz cars there. It aims to lift sales to 300 000 by 2015 with two thirds of those manufactured locally.China is currently Daimler's third-biggest market after Germany and the United States, but is expected to become the German group's number one market by 2020.According to the China Association of Automobile Manufacturers or CAAM, BAIC is China's fifth-biggest maker with sales of 1.69 million vehicles last year.Investors nevertheless appeared somewhat sceptical about the deal and Daimler shares were underperforming the overall market on the Frankfurt stock exchange, edging up only 0.08 percent while the blue-chip DAX 30 index rose by 0.26 percent.

Eurozone inflation nears ECB goal

Eurozone inflation fell more than expected in January in a sign that companies were cutting prices to entice consumers at a time when joblessness remained at a record level at the end of 2012.The rate of consumer price inflation in the 17 countries using the euro fell to 2% in January compared to a year ago, the EU's statistics office Eurostat said on Friday.The reading, Eurostat's first estimate, was lower than the 2.2% level forecast by economists polled by Reuters, which was also December's level.Unemployment remained at a euro-era high of 11.7% in December, Eurostat also said, slightly lower than the 11.9% level expected by economists, but still higher than the European Commission's year-end 11.3% prediction.Inflation is now near the European Central Bank's target of close to, but below 2%, and along with record unemployment, gives the ECB room to cut interest rates again to stimulate the economy.But an improvement in eurozone business morale for the third straight month in January and better factory output suggest the bloc has passed the worst of its recession, meaning further ECB stimulus in the form of lower borrowing costs may not be necessary. "Inflation is non-existent," said Thomas Costerg, an economist at Standard Chartered in London. "Now with German inflation decelerating, that will fuel debate about how to do ECB's easing," he said, forecasting a cut in the ECB's main refinancing rate in the second quarter.The ECB's Governing Council kept rates on hold at its January meeting and will discuss rate policy again on February 7. The decision to keep policy on hold was unanimous last month, but economists are still divided over the ECB's next move. 38 out of 73 analysts polled by Reuters in January, said that the ECB will remain on hold in the first quarter. The ECB's task is also complicated by a divide between wealthier, northern countries which are showing signs of emerging from the eurozone's three-year debt crisis and countries such as Spain and Italy, that are in deep recessions."The story in the eurozone remains one of national divergence between the peripheries and the core," said Evelyn Herrmann, an economist at BNP Paribas in London, also pointing to a growing gap between the German and French economies.

 

Taiwan premier resigns over economy

Taiwanese Premier Sean Chen said Friday he has stepped down for health reasons, after the cabinet he heads came under fire for its poor handling of the economy."I have some health problems ... and I need to completely change my life and work style to reverse the situation," the 63-year-old finance expert told a press conference to announce his resignation."I believe that the economy will improve in the coming year. We have worked very hard on the planning for long-term issues and I hope everybody will continue to support the new team."Deputy premier Jiang Yi-huah, 53, a scholar-turned-politician and a former interior minister, will take over his job, Chen said.Chen's departure came as Taiwan's economy grew 1.25% in 2012 from a year ago at the slowest pace in three years due to shrinking exports. Chen, who previously headed the Financial Supervisory Commission, the main industry regulator, had a tense term since taking office as premier in early 2012.His cabinet frequently came under attacks over the sluggish economy and other controversial policies, with the opposition repeatedly demanding his resignation.Last year, Chen survived a parliamentary no-confidence vote - only the second in Taiwan history - over what opposition lawmakers deemed as his cabinet's failure to curb rising unemployment and inflation.Under Taiwan's political system the premier heads the cabinet and is appointed by the president.

'Rockstar' Clinton leaves lasting legacy

Hillary Clinton is stepping down as the top US diplomat firm in the belief she has restored America's global standing during her tenure that may also have traced a path to the White House in 2016.But as she sweeps out of the imposing buildings of the State Department for the last time on Friday, how will history judge her as secretary of state?How she stacks up against giants of American diplomacy like Henry Kissinger and James Baker and how she'll fill in the blank pages as she opens a new chapter in her life remain open questions.Clinton says she never once gave a thought to her legacy in the past four years. Instead, she just got up every day determined to work as hard as she could to promote America's interests.She now leaves office with the highest popularity rating of any of President Barack Obama's cabinet members, imbued with the title of "rock star diplomat" and with many saying she'll be the Democratic Party's strongest hope in the next elections, despite her constant denials that she is planning to run."Her contribution I think was fighting for resources for her own department, America's credibility in the world through her relentless travel, finding a 21st century agenda, I call it planetary humanism," said Wilson Centre vice president Aaron David Miller."These are important issues. They don't get you into the secretary of state hall of fame," Miller, a distinguished scholar who has served under six secretaries of state, said.Critics say Clinton cannot point to a signature issue achieved under her stewardship. The major challenges of the day - Syria, the new world order emerging from the Arab Spring, Iran's nuclear ambitions and the search for peace in the Middle East - she bequeaths to her successor John Kerry.Yet the Obama administration seized the opportunity to help prise open Myanmar, she showed effective diplomacy in negotiating the freedom of Chinese dissident Chen Guangcheng, helped the United States pivot its focus toward Asia and built a solid alliance in support of biting sanctions against Iran.And Clinton brought to Obama's administration her charisma, celebrity status and a willingness to travel, believing that even in this interconnected world, face-to-face meetings remain one of diplomacy's most important tools."Secretary Clinton, because of her celebrity and popularity, has been a great secretary of state from that respect. People are thrilled to meet with her. She's probably second best to meeting with Obama," said Isobel Coleman, senior fellow at the Council on Foreign Relations.Even hardened politicians found it hard to resist her charms, British Foreign Secretary William Hague revealed during a dinner in her honour."There is a wonderful stillness that descends on large halls full of diplomats and ministers the moment Hillary enters the room," he said.Hague praised Clinton's "infectious spirit of optimism, opportunity and hope" as well as her faith "in the power of friendship and persuasion".In pursuit of diplomacy, Clinton has travelled exactly 1 539 712.5km, visiting about 112 countries. She was the first US secretary of state ever to visit Togo, and the first in over half a century to fly into Laos."Remember what we faced in January 2009: Two wars. An economy in freefall. Traditional alliances fraying. Our diplomatic standing damaged," she told the Council on Foreign Relations on Thursday."And around the world, people questioning America's commitment to core values and our ability to maintain our global leadership."That was my inbox on day one as secretary of state."Four years on, while the world "remains a dangerous and complicated place", much has changed, Clinton argued, saying "we've revitalised American diplomacy and strengthened our alliances".Those dangers were highlighted by the September attack on the US mission in Benghazi, Libya, in which the ambassador Chris Stevens and three other Americans were killed.Whether the attack, and the scathing criticism of security failures by the State Department, will taint her career in the long-term is too soon to tell.Many argue that Clinton's emphasis on what she calls "soft power" - her unrelenting focus on women's rights, development issues, economic statecraft and lesbian and gay rights - may well be what she's remembered for."As a long-term enduring legacy, I think I'd feel prouder about that than having invaded another Middle Eastern country," Coleman said.Observers also point to Europe's renewed faith in America, after Clinton made 42 trips to the continent during her time in office."In 2009, everything needed to be rebuilt... she has succeeded in restoring America's image in the world. She has marked the return of multilateralism," a western diplomat said in an interview.Tyson Barker, director of transatlantic relations at the Bertelsmann Foundation North America, agreed that "Europe loves Hillary Clinton, and she's spent a lot of time here investing in that relationship."She has really carried the torch for reconciliation and European integration."

Japan PM vows new statement on WWII

Japan's hawkish Prime Minister Shinzo Abe told lawmakers on Friday he intends to release a new statement on World War II, a move that could cause friction with neighbouring nations including China."I would like to announce a future-orientated statement that will suit the 21st century," Abe said. "On the timing and the content I'd like to think thoroughly hereafter."The nationalist premier said he wanted to update a landmark statement issued in 1995 by then-prime minister Tomiichi Murayama, seen as a key step in what many Asian nations say was Japan coming to terms with its brutal history.The statement said Japan "through its colonial rule and aggression, caused tremendous damage and suffering to the people of many countries, particularly to those of Asian nations", adding the premier feels "deep remorse" and offers a "heartfelt apology".Abe said on Friday he was in agreement with previous sentiments, adding: "Japan in the past caused great damage and suffering to many countries, particularly in Asia. The Abe cabinet shares that recognition with past cabinets."In a possible hint the statement may come in 2015, he said: "The so-called Murayama statement was issued to commemorate 50 years after the war, and 60 years after the war the [Junichiro] Koizumi administration issued a statement."Neighbouring countries that came under the yoke of Japan's military tyranny in the first half of the 20th Century, notably China and South Korea, chafe at the idea of Japan reneging on its apology, which both insist was insufficient anyway.

NEWS,15.01.2013

Global economy enjoys sweeter sentiment

Global investors have entered 2013 in buoyant but not yet exuberant mood‚ according to the BofA Merrill Lynch Fund Manager Survey for January.The new year sees asset allocators assigning more funds to equities than at any time since February 2011‚ while their confidence in the world’s economic outlook has reached its most positive level since April 2010.Investors’ appetite for risk in their portfolios is now at its highest in nine years‚ while an increasing number judge equities as undervalued – particularly in Europe. Moreover‚ investors have reduced cash holdings to 3.8% from 4.2% in December.This marks the most positive reading of this measure of willingness to hold riskier investment assets since April 2011‚ though it has not reached levels that would represent a contrarian sell signal.Participants’ perception of the US fiscal crisis as the biggest “tail risk” for asset markets has calmed (down nearly 20% points in two months)‚ though it remains their largest concern. Views of China remain very positive‚ with a net 63% still anticipating a stronger economy this year‚ but one in seven sees a Chinese hard landing as their number one risk.Investors’ bullishness reflects a growing confidence in economic recovery. A net 59% now expect the global economy to strengthen this year‚ compared to a net 40% a month ago. This marks the panel’s most positive outlook since April 2010. An increasing proportion of respondents expect inflation to pick up as well.“Following the resolution of the US fiscal cliff‚ sentiment has surged. Half of investors now tell us that they would sell government bonds to buy higher-beta stocks‚ which is consistent with increasing growth and inflation expectations‚ and with our call for a ‘Great Rotation’ to start in 2013‚” said Michael Hartnett‚ chief investment strategist at BofA Merrill Lynch Global Research. “While the survey reveals pockets of exuberance‚ undemanding valuations in Europe should underpin equities unless earnings growth fails to materialize‚” added John Bilton‚ European investment strategist.49% of respondents now expect government bonds to be sold to fund purchases of higher beta equities and sustain the “risk on” rally. Last month‚ in contrast‚ only 37% saw the instrument as the likeliest source while 28% expected this to be reduction of cash balances (now 22%) and 19% expected defensive equities (now 15%).In this environment‚ the perception of Italy as a substantial “tail risk” for Europe has declined sharply. Only 17% of the panel now views the country as the biggest threat to the European story‚ compared to 26% in December. Assessments of the threats from France and Spain have worsened from last month‚ however‚ up to 34% and 29%‚ respectively.The panel has shifted its stance on financial stocks strongly‚ moving to its first net overweight in global bank names since February 2007 following a 15% move versus last month. Nevertheless‚ banks are still perceived as the global equity market’s most undervalued sector. The existing overweight in insurance has also been extended‚ particularly in Europe‚ and now stands its highest level since January 2007.In contrast‚ appetite for telecoms stocks has fallen to a net 25% underweight. This marks the sector’s lowest weighting from asset allocators since December 2005. While still in positive territory‚ pharmaceuticals have declined to a net 11% overweight. Their fall from a net 24% last month is January’s largest sectoral move.The perception that consumer staples companies are the most overvalued has also accelerated month-on-month.The new Japanese government’s policies continue to improve the country’s outlook. Its growth composite indicator now stands at a striking reading of 96.Against this background‚ global fund managers are turning more positive. A net 3% are now overweight Japanese equities‚ a sharp reversal of last month’s net 20% underweight. The proportion of investors viewing Japan as the most undervalued market increased this month as well‚ while a growing number see it as having the most favourable outlook for corporate profits.

US could lose gold-chip rating

The United States could lose its top credit rating from a leading agency for the second time if there is a delay in raising the country's debt ceiling, Fitch Ratings warned Tuesday.Congress has to increase the country's debt limit, which effectively rules how much debt the US can have, by March 1 or face a potential default.There are fears that the debate will descend into the sort of squabbling and political brinkmanship that marked the last effort to raise the ceiling in the summer of 2011. The US Treasury Department warned then that it had nearly reached a point where it would be unable "to meet our commitments securely".Standard & Poor's was so concerned by the dysfunctional nature of the 2011 debate that it stripped the US of its triple A rating for the first time in the country's history. Like Fitch, Moody's has a negative view on the US outlook."The pressure on the US rating, if anything, is increasing," said David Riley, managing director of Fitch Ratings' global sovereigns division. "We thought the 2011 crisis was a one-off event ... if we have a repeat we will place the US rating under review."Fitch already has a negative outlook on the US as the country's debt burden has risen to around 100% of its gross domestic product, and has said it will make a decision on the rating this year, regardless of how the debt ceiling discussions pan out. The US government reached its statutory debt limit of nearly $16.4 trillion at the end of 2012 but has engineered extraordinary measures that should see it through February.Riley's comments come just two weeks after US lawmakers agreed a budget deal with the White House that avoided the so-called fiscal cliff of automatic tax increases and spending cuts that many economists thought could plunge the US economy, the world's largest, back into recession. Relief that a deal was cobbled together, albeit at the final hour, is one of the reasons why sentiment in the financial markets has been buoyant in the first trading days of the new year. Many stock indexes around the world are trading at multi-year highs."The fiscal cliff bullet was dodged .... (but it's) a short-term patch," said Riley.Riley warned that the different arms of the US government still have a number of issues to address. As well as increasing the debt ceiling, they have to agree to spending cuts that were delayed as part of the fiscal cliff agreement and back measures to avoid a government shutdown, potentially in March.Though short-term fixes are more likely than not, Riley said the US political environment is not as good as it should be for a country holding the gold-chip AAA rating. The past few years, Riley said, have been marked by "self-inflicted crises" between deadlines.The major reason behind the lack of swift action in the US is that the Democrats control the White House and the Senate, while the Republicans have a solid majority in the House of Representatives. Both sides have differing visions of the role of the state in society and often varying political objectives.Despite his cautious tone on the rating, Riley said the US has a number of huge advantages and that getting the country's public finances into shape will not require the same level of austerity that many countries in Europe have had to enact over the past few years, partly because the US economy is growing at a steady rate.Other factors that support the US's AAA rating are the country's economic dynamism, lower financial sector risks, the rule of law as well as the global benchmark status of the country's bonds and the dollar, Fitch says.However it says these "fundamental credit strengths are being eroded by the large, albeit steadily declining, structural budget deficit and high and rising public debt".

US debt ceiling hike critical

Federal Reserve Chairperson Ben Bernanke on Monday urged US lawmakers to lift the country's borrowing limit to avoid a potentially disastrous debt default, warning that the economy was still at risk from political gridlock over the deficit. Likening Congress to a family arguing that it can improve its credit rating by deciding not to pay its credit card bill, Bernanke said that raising the legal borrowing limit was not the same as authorising new government spending. "It's very, very important that Congress takes the necessary action to raise the debt ceiling to avoid a situation where our government doesn't pay its bills," he told an event sponsored by the University of Michigan. The US Treasury says the country bumped into its borrowing limit on December 31, and it is now employing special measures to enable the government to meet its financial obligations. US leaders did agree at the beginning of January to extend tax cuts for all American families earning less than $450 000 a year to avoid a portion of a "fiscal cliff" of policies that Bernanke had warned would likely tip the economy into recession. But lawmakers must still navigate the debt limit as well as thrash out a deal over drastic automatic spending cuts that were postponed until March 1."We're not out of the woods because we are approaching a number of other fiscal critical watersheds coming up," Bernanke warned on Monday.The Fed last month opted to keep buying $85bn worth of Treasury bonds and mortgage-backed securities a month until it saw a significant improvement in the labor market outlook, in an aggressive bid to push down borrowing costs and spur hiring.It has held interest rates at nearly zero since December 2008 and has said it will keep them at this ultra-low level until unemployment reaches 6.5%, provided that inflation does not look likely to breach a threshold of 2.5%. US unemployment in December remained at a lofty 7.8%.The president of the San Francisco Federal Reserve Bank, John Williams, said earlier on Monday that he expected the central bank's bond buying would be needed "well into the second half of 2013." Minutes from the Fed's December 11-12 policy meeting released earlier this month showed several policy makers favored ending the bond purchases well before the end of this year, while a few officials thought the purchases would be warranted until the end of 2013.A third policy-maker who spoke on Monday, Dennis Lockhart, president of the Atlanta Federal Reserve Bank, stressed that the open-ended, or meeting-to-meeting nature, of the Fed's commitment to buy assets did not mean the policy would continue indefinitely. "'Open ended' does not mean 'without bound.' The program is not 'QE Infinity,'" he told the Rotary Club of Atlanta.

NEWS,09.08.2012

China's inflation slows to 1.8% low

Chinese inflation hit a two-and-a-half-year low in July, official data showed on Thursday, giving the government further policy leeway to boost weakening growth. The country's consumer price index (CPI) rose 1.8% year-on-year (y/y) last month, the National Bureau of Statistics said, the fourth straight month of y/y easing and the lowest level since January 2010.The slowdown potentially gives authorities more ammunition to light a fire under the world's second-largest economy, which grew 7.6% in the second quarter for its worst performance since the height of the global economic crisis in 2008-2009.Authorities this year have taken measures including the rare step of slashing interest rates twice in quick succession while also lowering requirements for how much money banks must keep in reserve.Chinese leaders, including Premier Wen Jiabao, have expressed concern over the weakness in the economy and have hinted that the government may need to take further action to bolster growth.Sun Junwei, China economist at HSBC in Beijing, said the figure was in line with expectations and confirmed that inflation overall is trending downward."In general, China's inflation will likely be moderate and controllable in the future, which offers room for China to further loosen its (monetary) policy," she said.Sun added that if other economic data due out later on Thursday comes in worse than expected there could be a further cut in interest rates or bank reserve requirement ratios in August.China is scheduled to announce July figures in industrial production, fixed asset investment and retail sales later Thursday.Helping suppress the overall consumer price index was a decline of 0.9% in prices for transportation and telecommunications, according to the data.Inflation for the first seven months of 2012, meanwhile, was 3.1%, the bureau said."Inflation continues to peel off rapidly, highlighting an output gap that the government is trying to plug with rising state investment," economists at IHS Global Insight said in a report after the release of the July data.Producer price inflation (PPI), a leading indicator, declined 2.9% in July from the same month last year for the fifth straight month of contraction.Producer prices "continue to highlight the severe deflationary pressure rippling across the country", IHS Global Insight said, noting that "deflation, not inflation, is the greatest short-term threat to the Chinese economy".

Eurozone GDP to fall by 0.3% this year

The eurozone economy will contract by 0.3% in 2012 before recovering more slowly than expected next year to expand by 0.6%, a poll conducted by the European Central Bank (ECB) revealed on Thursday. The data came from the Survey of Professional Forecasters which the ECB carries out on a quarterly basis. It was published in the Frankfurt-based bank's monthly bulletin.The previous SPF survey predicted a 0.2% contraction for eurozone gross domestic product (GDP) this year and a 1% expansion in 2013.Recession-inducing austerity measures in some euro countries and "higher uncertainty" over the resolution of the single currency's debt crisis were "the main factors behind the downward revisions," the ECB said.Forecasters also said that eurozone unemployment would stay at its current high of 11.2% throughout 2012 and increase to 11.4% in 2013. Inflation was projected to fall from 2.3% to 1.7% over the same period.The ECB said it expected "weak" economic activity both in the second and third quarter of 2012 and only a "very" gradual recovery afterwards. "Risks surrounding the economic outlook for the euro area continue to be on the downside," it noted.The European Union statistical office, Eurostat, is to publish GDP figures for the second quarter of the year on Tuesday.

India's shock fall in industrial output

India's industrial production contracted by a shock 1.8% from a year earlier in June, as manufacturing output shrank in Asia's third-largest economy, official figures showed on Thursday, The data underscored the massive job ahead for India's new pro-market finance minister, P. Chidamabaram, who pledged this week to "restart the growth engine" of India's sharply slowing economy.Manufacturing output, which accounts for three-quarters of the index of industrial production, fell 3.2% from a year earlier in June, according to the government data.Manufacturing has been undermined by high interest rates to combat stubbornly high inflation, falling business confidence and Europe's debt crisis which has hit exports.The 1.8% shrinkage in output by factories, mines and utilities in June was the third contraction in four months and followed a revised 2.5% production rise in May.The industrial output reading was far below analysts' expectations, which were for an increase of 0.80%, according to a Dow Jones Newswires poll.The weak performance is likely to pile pressure on the central bank to ease interest rates to spur growth.The bank has said it wants inflation to come down before cutting borrowing costs, but Chidambaram has already indicated he wants lower rates, saying "sometimes it is necessary to take carefully calibrated risks".The weak numbers come as the left-leaning Congress-led government is under pressure over a string of graft scandals and its attempts to liberalise the still inward-looking economy to spur growth have led to gridlock in parliament.India's once-booming economy grew just 5.3% between January and March, its slowest annual quarterly expansion in nine years.Capital goods output, an important investment indicator, slid 27.9% in June from a year earlier.Goldman Sachs economist Tushar Poddar, who recently pared his full fiscal year growth forecast to 5.7% in contrast to the central bank's expectation of 6.5% expansion, saw more tough times ahead."Weak monsoons are also likely to impact rural consumption demand and exacerbate weakness in investment demand," Poddar said ahead of the data.Citibank has said if a nationwide drought is declared, which would be the country's third in a decade, growth could be as low as 4.9% as hundreds of millions of farmers depend on the annual rains for their income.