US economy suffers sharp nosedive

Falling exports have hurt US economic growth

The US economy shrank at an annual rate of 6.2% in the last three months of 2008 official figures show, a far sharper fall than previously reported.

Plunging exports and the biggest fall in consumer spending in 28 years dragged the annualised figure down from an earlier estimate of 3.8%.

The decline was much worse than analysts had expected, sending US stocks spiralling lower.

In 2008 as a whole, the economy grew by 1.1%, the slowest pace since 2001.

The blue-chip Dow Jones industrial average dropped 119.15 points, or 1.66%, to 7,062.93. The broader Standard & Poor's 500 Index fell 2.36% to 735.09 - a 12-year low.

Recession warning

Consumer spending, which accounts for about two-thirds of domestic economic activity, fell by a rate of 4.3% in the final quarter - the biggest fall since the second quarter of 1980. This was a revision of the earlier figure of 3.5%.

With rising unemployment, sliding home values, increasing numbers of repossessions and the slumping value of investments, observers say many US consumers are hanging on to whatever disposable cash they have.

Meanwhile, exports - which had until recently been supporting the economy - fell at the sharpest rate since 1970 at an annual rate of 23.6%, down from 19.7%.

Earlier this week, Federal Reserve chief Ben Bernanke warned Congress that without the right policies from the government, the US recession could last into 2010.

But he said if the Obama administration and the central bank can restore some measure of financial stability, 2010 could be a year of recovery.

President Obama recently signed a $787bn (£556m) recovery package of increased government spending and tax cuts, and unveiled a $75bn scheme to stem repossessions.

No good news

The latest GDP figures were "just awful" said Matt Esteve, a currency trader at Tempus Consulting in Washington DC. "It shows the weak state of the world's largest economy."

And Boris Schlossberg, director of currency research at GFT Forex said there was "doom all over".

He predicted that the dollar would not weaken too much against the euro because "there's no good news on the other side of the Atlantic, either".

India's economy: Can the boom last?

For the Indian economy the year 2003 ended on a high - on 20 December, the foreign exchange reserves breached the $100bn mark.

Fancy shopping malls cater to newly-enriched consumers

The year also saw Indian companies breaking into the international corporate market, making 35 global acquisitions totalling $450m.

Thinking internationally, Prime Minister Atal Behari Vajpayee floated the idea of a common currency for South Asia.

And the industrial sector is booming. Car sales in November were 41% higher than the previous year. Overall, Gross Domestic Product is expected to grow by more than 7% in the financial year ending in March 2004.

But it is easy to over-interpret this news.

Your views on India's economic prospects

Growth challenge

A sober analysis indicates that India is continuing to do well, as it has done since 1993, with 6% per annum average growth.

Boom-time in Bombay: Record share prices spark a trading frenzy

This robustness, combined with the advantage of its size, means that it is a country that global players cannot ignore.

But if India is to go beyond this, to a sustained annual growth rate of over 8%, and with benefits reaching all levels of society, more needs to be done by government than whipping up electoral support by pointing to the headlines.

It is worth remembering that India has seen brief growth spurts before - its growth rate in 1988-89 exceeded 10%.

The challenge therefore, is to bring about sustained growth.

Economic interest

Consider the $100bn foreign exchange (forex) news.

The large reserve points to a good performance by the Reserve Bank - the reserve was $5.83bn in 1991.

But, in itself, this does not mean as much as the screaming newspaper headlines on 21 December suggested.

What was more significant was the fact that the news made the headlines.

Never before has dry, economic news been celebrated so widely in India.

The interest of the citizenry in such matters was reminiscent of South Korea in the 1980.

It augurs well for India as it compels politicians to divert some of their attention from politics to economics.

The forex reserve of a government is like an individual's bank balance.

The fact that it is high does not indicate economic strength and preparedness to respond to emergencies. Rather, it reflects the person's preference for keeping money in a bank rather than investing it in assets.

Indeed, there are economists who argue that India should run down a part of its reserve to increase investment.

Order first

The other big news was also one where the symbolic value outstripped the actual.

Appetite for luxury: A saleswoman shows off costly Indian jewels

This was the idea floated by Indian Prime Minister Vajpayee of a common currency for South Asia.

Although this is not about to happen, the suggestion shows a level of maturity that political leaders can think in terms of economic co-operation even while political irritants remain.

Moreover, the very effort to build such co-operation could serve to reduce the risk of political conflict.

To guarantee long-run strength, the Indian Government needs to:

Raise the level of investment (and that includes investment in people)

Make a fetish of efficiency

Make it easier for new private firms to start up business.

India's investment rate has remained virtually stationary at 24% (with a slight fall in the last three years).

A sustained growth rate of over 8% will not be possible unless the investment rate rises to 30%. That, in turn, requires the government to put its fiscal house in order.

Sweet subsidies

On the human side, India has done better than Pakistan, but worse than its much poorer eastern neighbour, Bangladesh, in many dimensions.

In 1990, under-5 child mortality (that is, the number of deaths before age 5 per 1000 children) was 144 in Bangladesh, 128 in Pakistan and 123 in India.

By 2001 the numbers were Bangladesh 77, India 93, and Pakistan 109.

India's rural poor are still waiting for their share of the economic pie

As far as school enrolment of girls as a percentage of boys go, the figure for Bangladesh is an exemplary 103%, whereas for India it is 78 and for Pakistan 61.

India is a potential global economic power.

But for that potential to be realised, its promise must not be treated as an instrument of short-term electoral popularity. Instead, the government must invest more on infrastructure and social improvement.

For the Indian government to spend as much as it does - on subsidies and the bureaucracy - and then to wonder why the economy is not growing faster is like my father's youngest sister who in her old age lamented to me, "I don't know why I keep such poor health - I eat only sweets."

Dollar rises on Bernanke comments

The dollar has rebounded from recent lows after US Federal Reserve boss Ben Bernanke said he would tighten monetary policy when the economy recovers. The comments eased concerns about the inflationary impact of US interest rates remaining at the current level of between 0% and 0.25%. Higher rates would also make the dollar more attractive to investors. Mr Bernanke's comments saw the dollar rise against the yen, and also gain against the euro and the pound. The pound was down 1.4% against the dollar at $1.5870 , while the euro had fallen 0.7% to $1.4705, and one dollar was worth 89.76 yen.

'Prevent inflation'
"Accommodative [fiscal] policies will likely be warranted for an extended period," Mr Bernanke said in a press conference at the Fed's Washington headquarters. "At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road." US economic data continues to point to a slow and patchy recovery in the world's largest economy. While a report last week showed that US firms cut more jobs than expected in September, figures this week detailed a rise in retail sales, and unemployment claims falling to a nine-month low.

Tata buys breathing space as it raises $750m

Tata Motors has raised $750m through an international share sale and convertible bond issue, completing the prolonged refinancing of a $3bn bridge loan it raised to fund its acquisition of former Ford marques, Jaguar and Land Rover, last year. The move, in which Tata Motors sold $375m of global depositary shares and the same amount in convertible bonds, buys India’s largest automotive producer some breathing space as it negotiates one of the most difficult periods in its history.Moody’s Investors Service analyst Ivan Palacios said in a research note: “Moody’s expects to see a slow but progressive improvement in [Tata Motors’] performance in the following quarters.”Tata Group, India’s largest conglomerate, bought Jaguar and Land Rover in June last year at the tail end of an overseas acquisition drive in which it also purchased Anglo-Dutch steel producer Corus and a number of other companies. The Jaguar and Land Rover acquisition ran into trouble. The global financial crisis made it difficult for Tata to refinance the bridge loans used for the purchase even as demand for cars plummeted.

With markets picking up, however, Tata Motors has lined up about £500m ($794m) of financing facilities for Jaguar and Land Rover, relieving some of the pressure on its own balance sheet. The group has been forced to pump more than £1.2bn into the two brands to keep them afloat. Tata Motors said on Friday the GDS and convertible bond offering was closed in less than an hour after it received bids for more than double the original amount on offer. “The deal size was upsized from a base $600m to $750m,” it said, adding that the GDSs were sold at a 1.5 per cent discount to Tata Motors’ closing price in Mumbai on Thursday of Rs589.25. The notes, due in 2014, were sold with a coupon of 4 per cent and a conversion premium of 7.5 per cent over the GDS price.

Tata Motors shares ended down 6.6 per cent at Rs548.30 per share on Friday as investors worried about the dilution from the GDS offering. The stock has tripled in value this year, helped by the improvement in the global automotive sector outlook. An analyst with a foreign brokerage in Mumbai said Tata Motors was taking advantage of a benign market to raise money against a future full of uncertainties. The outlook for Jaguar and Land Rover remained difficult, with a turnround in the UK-based businesses likely to take time. “They are making hay while the sun shines,” the analyst said. “They probably should have raised more.” Moody’s also cautioned that Tata Motors’ leverage remained high. “Moody’s expectation that the company will generate negative free cash flow in fiscal year 2009-10 means further leverage reductions will be challenging,” Mr Palacios said. Copyright The Financial Times Limited 2009. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

GM agrees Chinese sale of Hummer

General Motors (GM) has agreed to sell its iconic Hummer brand to Chinese firm Sichuan Tengzhong Heavy Industrial Machinery for an undisclosed fee.

The two parties had been in talks about the sale for a number of months. GM is in the process of selling and winding up a number of brands as it looks to reorganise after emerging from bankruptcy protection in July. At the start of this month, the troubled carmaker announced it would be winding down its Saturn brand. This was after the proposed sale to Penske Automotive Group collapsed. GM has already announced that it is discontinuing the Pontiac brand, and is close to finalising the sale of its European brands Saab, Opel and Vauxhall. GM plans to reinvent itself by concentrating on fewer brands following bankruptcy protection, made necessary after car sales plummeted during the downturn.

'Next generation'
Under the terms of the Hummer deal, Tengzhong will take an 80% stake in the company, with the remaining 20% going to Hong Kong entrepreneur Suolong Duoji. The current Hummer management team will continue to run the company. The deal is still subject to regulatory approval. "Hummer is a strong global niche brand and this agreement signifies another important milestone in writing the next chapter of both GM and Hummer," said GM boss Fritz Henderson. The company also said it would be focusing on improving efficiency, including the introduction of diesel engines. "We are excited about some of the initiatives already underway at Hummer that we believe our investment will be able to accelerate, particularly related to the creation of the next generation of more fuel efficient vehicles to meet not only future regulations but also customer expectations," said Yang Yi, chief executive of Tengzhong.

Star struck
Hummers were originally built as military off-road vehicles by a company called AM General. The brand took off as US motorists flocked to the sport utility vehicles favoured by celebrities including Arnold Schwarzenegger. GM bought the Hummer brand in 1999, but sales have suffered recently as the gas-guzzling performance and military image have become less popular.
Hummers weigh up to five tons and have fuel consumption of around 15 miles per gallon. Tengzhong specialises in making equipment for the road, construction and energy industries. It is based in China's Sichuan province.

Fall in Japan's unemployment rate

The rate of unemployment was expected to have continued ri

Japan's jobless rate unexpectedly fell to 5.5% in August from July's record high of 5.7%, official figures showed.

But the number of people unemployed hit a six-year high of 3.61 million in August, a figure which was up 32.7% on the same month of 2008. Official figures also showed that household spending rose 2.6% in August from a year earlier. Also on Friday, US figures for September showed 263,000 jobs had been lost, taking the jobless rate to 9.8%.

'Worst levels'

Analysts had been expecting the Japanese jobless rate to rise again in August. "The unemployment rate fell earlier than expected, but we don't know yet whether it is just a dip for one month or something more continuous," said Masamichi Adachi, senior economist at JPMorgan Securities. The quarterly Tankan survey of business confidence on Thursday had indicated that companies were feeling better than they had three months before, but that they still felt they had too much capacity and too many workers.

The number of workers employed in manufacturing fell almost 10% year on year, but the number employed in the care and hospitality sectors rose. There was a cautious response to the figures from the government. "The figures may give the impression that the situation has improved a bit," said Labour Minister Akira Nagatsuma. "However, it continued to be around the worst levels in the post-war period."

Global economy expanding says IMF

The IMF says unemployment will remain

The global economy is expanding again and financial conditions have improved significantly, the International Monetary Fund (IMF) has said.

But in its latest World Economic Outlook, the IMF said the "pace of recovery is expected to be slow". It added that the recovery is likely to be "insufficient to decrease unemployment for quite some time". On Wednesday, the IMF cut its forecast for the amount that banks are likely to lose in bad loans and investments. The total it expects banks to lose between 2007 and 2010 is now $3.4tn (£2.1tn), down from its previous estimate of $4tn. This reduction is a direct result of the improved outlook for the global economy.

Separately, the head of the European Central Bank (ECB) said that the 16 countries in the eurozone should withdraw stimulus packages in the next two years. "From an ECB point of view, it is important to do what is necessary to exit as soon as possible," Jean-Claude Trichet said at a meeting of EU finance ministers and central bank governors in Gothenburg. "It is important in our view that it starts as soon as the recovery starts. It is something which is essential for the recovery itself. "I would say, in our own view, at the latest in 2011."

Recovery risks

The global recovery is being led by Asia, where economies have "withstood the financial turmoil much better than expected," the IMF said. But gains are now being seen in developed economies, where "financial market sentiment and risk appetite have rebounded", it added. Despite the improved outlook, however, the fund said there were a number of risks to the recovery. It cited major government stimulus packages, central bank support and restocking by companies that have run down inventories as three temporary factors that "will diminish during the course of 2010".

It also highlighted the fact that banks are being forced to hold more cash in reserve, which will limit the amount of credit available "for the remainder of 2009 and into 2010". With less money available to companies and individuals to borrow, and therefore invest, demand may be stifled. Most serious, it concluded, was the fact that "private demand in advanced economies remains very weak".

Increased growth

The IMF predicts that the US economy will contract by 2.7% in 2009, before growing by 1.5% next year. The eurozone, it thinks, will shrink by 4.2% this year and grow by 0.3% in 2010. It has upgraded its forecast for UK economic growth to 0.9% next year, up from a previous estimate of 0.2%. This puts the UK top of Europe's leading economies for growth in 2010, alongside France. The German economy, the IMF thinks, will grow 0.3% next year, while the Spanish economy will shrink by 0.7%. The world's fastest-growing economy in 2010 will be Singapore, which will expand by 4.1%, closely followed by Taiwan, Slovakia, South Korea and Hong Kong, according to the fund.