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Europe Finds Slope Ahead Is Growing Ever Steeper

October 4, 2011 by Leave a Comment

Greece, Ireland, Portugal and Spain are already in downturns or fighting to escape them, as high unemployment and austerity measures bite. But in the past few weeks, Germany and France, the Continent’s powerhouses, have also started to falter, hurt as struggling banks tighten their lending and orders for business from the indebted countries of Europe ebb.

“The sovereign debt crisis is like a fungus on the economy,” said Jörg Krämer, the chief economist at Commerzbank, who last week joined the growing crowd of analysts who are now predicting that Europe is headed for a recession. “I thought it would be just a slowdown, as is not unusual after a recovery. But I have changed my mind.”

The euro zone economy has already slowed to essentially no growth. It could stay in a slump, many economists say, at least through next spring. If that happens, tax revenues are likely to fall and unemployment is expected to rise, making it even more difficult for Europe to deal with the sovereign debt crisis and protect its shaky banks.

Worse, emerging markets that are important customers for European exports, like China and Brazil, are tightening credit to prevent their economies from overheating. The United States, another main market, is stuck in its own economic rut.

In a sign of how quickly the ground is shifting, the European Central Bank on Thursday could well lower interest rates — just a few months after it started raising them in what is now seen by many as a misguided effort to stem incipient inflation.

Distress is increasingly evident across Europe. Philippe Leydier had been feeling more upbeat about his business until this summer, when orders for his French company’s corrugated boxes suddenly began to slide. Orders fell further last month as auto parts makers, electrical engineering firms, farmers and other industries reduced production.

“The euro crisis and the financial crisis linked to the debt of European countries is serious,” said Mr. Leydier, whose box and paper manufacturing business in Lyon, Emin Leydier, often provides an early signal of seismic shifts in economic activity. “European governments need to find a solution — and fast.”

In Italy, which has the euro zone’s third-largest economy, after those of Germany and France, a €45 billion, or $60 billion, austerity program has many worried about a recession. Paolo Bastianello, the managing director of Marly’s, a clothing retailer, has also seen his hopes fade.

At the start of the year, Mr. Bastianello was more optimistic that Europe might escape its troubles and that Italy’s dysfunctional government would seriously tackle the country’s problems. “But the turbulence of the markets and the uncertainty about this abnormal mass of public debt just scare people away from buying,” he said.

Not everyone is so pessimistic, especially in Germany. But even there, indicators are pointing to slower growth.

German executives say sales remain healthy, at least so far. “We don’t see any impact on our business,” said Roland Busch, a member of the management board of Siemens, the electronics and engineering giant based in Munich.

“The economy is cooling down but not more than that,” said Mr. Busch, who oversees a unit that supplies traffic-control systems, street cars and other products for public works.

Expecting demand for urban infrastructure improvements to grow, Siemens plans to add about 150 people over the next two years to the 850 employees at its complex in Sacramento, California, that makes light-rail cars.

Bucking the trend almost everywhere else in the developed world, unemployment in Germany continues to fall, and there are shortages of skilled workers in several key sectors.

“We know Germany is an exception,” said Jörg Köther, a spokesman for the IG Metall union.

Article source: http://www.nytimes.com/2011/10/05/business/global/europe-finds-slope-ahead-is-growing-ever-steeper.html?partner=rss&emc=rss

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Economix Blog: Simon Johnson: More Transparent Bank Stress Tests Are Needed

August 25, 2011 by Leave a Comment

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Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Europe and the United States both need to conduct another round of stress tests on their banks, with a model similar to what was done in the United States in 2009, but with a more negative downside scenario — in particular, assessing the effects of a major sovereign debt problem in the euro zone.

Today’s Economist

Perspectives from expert contributors.

The point of such a scenario is to determine how much equity financing banks need to have if the world economy turns ugly. If the big banks raise more capital in advance, we are less likely to see economic downturn again become financial catastrophe.

The prevailing wisdom about Europe is that it faces primarily liquidity problems. In this view, a few of the larger countries have had trouble rolling over their debts, and some leading banks need help with short-term financing. The European Central Bank can assist with both by buying government bonds and lending to banks and, in the most optimistic interpretation, the consequent political discussions will help strengthen European Union integration.

There are two problems with this positive spin on recent events. The first is that sovereign debt problems can easily become solvency issues — that is, more about whether countries can afford to service their debts rather than whether they can raise enough cash at reasonable rates in any given week. The key issue is growth — if Italy, Spain and others can show they will grow reasonably quickly, then debt relative to gross domestic product will decline, and rosy projections will be back in fashion.

But if signs of growth do not return soon, perhaps over three to six months, the next downward revision to forecasts will spread deeper debt pessimism. And any markdown for global growth prospects, including for reasons outside Europe’s control (such as overheating in China’s residential property market), would also not be helpful over the coming year. My Peterson Institute policy paper with Peter Boone in July suggested some potential escape routes, but the summer so far has produced only further attempts to muddle through.

The more immediate Achilles heel is banking. The virtues of big European banks were extolled by some Congressional representatives during the Dodd-Frank legislation in spring 2010. What a difference a year makes; not many members of Congress would today endorse anything about European banking, given all the problems that have emerged.

The main immediate problem for Europe is that we still don’t know exactly the condition of its major financial institutions. The Europeans have run bank stress tests twice recently, in mid-2010 and again earlier this year. But in both cases the tests were far too lenient and banks were not required to raise enough capital.

They should have been compelled to increase their equity funding relative to their debt, in order to create a greater buffer against future losses.

The 2009 banking stress tests in the United States can also be criticized for not including a scenario that was sufficiently negative. In recent weeks the market has expressed great skepticism about Bank of America, its inherited liabilities, future business model and, most of all, the adequacy of its capital.

Most likely, Bank of America needs to be broken up, with the continuing businesses funded with equity to a level that could withstand adverse legal outcomes and a deep recession. (For more background on how to think about bank equity, see the recent testimony of Paul Pfleiderer to the financial institutions subcommittee of the Senate Banking Committee; anyone working on banking policy in Europe or the United States should read this.)

Dodd-Frank created pre-emptive intervention powers, at the behest of Treasury and the Federal Reserve, with part of the rationale being that these could be used to prevent a megabank’s slow death spiral from becoming a market panic.

In “13 Bankers,” James Kwak and I expressed considerable skepticism that this could work — it just does not fit with the history and politics of regulation in the United States, within which even the Treasury secretary defers to what Bloomberg News calls the “Wall Street Aristocracy.”

The American 2009 Supervisory Capital Assessment Program, known as SCap (pronounced ESS-cap), was designed to reveal potential stressed capital levels and, as a result, the 19 companies covered by SCap have since increased their common equity by more than $300 billion.

Unfortunately, weakness at Bank of America generates systemic risk, undermines overall market confidence and magnifies the risk of another recession; this is exactly what SCap is supposed to have avoided — but failed to do because it was not sufficiently tough.

The Comprehensive Capital Analysis and Review stress tests, known as CCar (pronounced SEE-car), concluded in April 2011, were even less helpful. These were much less transparent, focused more on companies’ internal capital planning processes. The Fed did sensitivity analysis of the companies’ own stress tests; this is not exactly reassuring, given how badly the industry’s own models have failed in the recent past — including in the events that led up to the Fed’s $1.2 trillion of emergency loans in 2008.

Yet the European stress tests to date must be rated a notch or three below even the CCar in terms of transparency and communication of information that allows market participants to make informed decisions. The latest round, conducted by the European Banking Authority through July 15, did not even examine what would happen if a sovereign borrower had to restructure its debts — exactly what Greece was working on during the same time frame. (To be precise, there was some “sovereign stress” in the tests but very little compared with what we have seen and could see.)

This is worse than embarrassing. It creates exactly the wrong kind of uncertainty around European megabanks, including their operations in the United States and potential spillover effects.

In part this happened because the European Banking Authority is new — it came into existence on Jan. 1 — and not sufficiently powerful relative to national bank supervisors, many of whom are stuck in an old mindset where transparency is bad and full disclosure of banks’ balance sheets is scary. (The low capital levels of European banks was described more fully this week in a Bloomberg article.)

But partial facts and distorted information flow are exactly what creates fear and instability, not just in Europe but much more broadly.

If euro-zone leaders want to make any progress on governance reform, they should immediately strengthen the banking authority and call for a new round of stress tests. These tests should include a deep recession scenario in Europe, as well as disruptions to sovereign debt financing. At the same time, the Federal Reserve should acknowledge that the CCar was not enough; it’s time for a new round of tough stress tests here, as well.

The notion that bank equity is socially expensive and should be minimized is an idea whose time has passed — as Anat Admati, Peter DeMarzo, Martin Hellwig and Professor Pfleiderer have argued. It is time to find ways to strengthen the equity funding of major financial institutions around the world, quickly, fairly and effectively — a point that was made clear in the recent hearings held by Senator Sherrod Brown, Democrat of Ohio.

Any further delay risks worsening the global slowdown.

Article source: http://feeds.nytimes.com/click.phdo?i=002f16554526f35acb05e5ffd2601827

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Economix Blog: A Second Great Depression, or Worse?

August 18, 2011 by Leave a Comment

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Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

With the United States and European economies having slowed markedly according to the latest data, and with global growth continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression?

Today’s Economist

Perspectives from expert contributors.

The easy answer is “no” — the main features of the Great Depression have not yet manifested themselves and still seem unlikely. But it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind seen with some regularity in the 19th century, particularly if presidential election-year politics continue to head in a dangerous direction.

The Great Depression had three main characteristics, seen in the United States and most other countries that were severely affected. None of these have been part of our collective experience since 2007.

First, output dropped sharply after 1929, by over 25 percent in real terms in the United States (using the Bureau of Economic Analysis data, from its Web site, for real gross domestic product, using chained 1937 dollars). In contrast, the United States had a relatively small decline in G.D.P. after the latest boom peaked. According to the bureau’s most recent online data, G.D.P. peaked in the second quarter of 2008 at $14.4155 trillion and bottomed out in the second quarter of 2009 at $13.8541 trillion, a decline of about 4 percent.

Second, unemployment rose above 20 percent in the United States during the 1930s and stayed there. In the latest downturn, we experienced record job losses for the postwar United States, with around eight million jobs lost. But unemployment only briefly touched 10 percent (in the fourth quarter of 2009; see the Bureau of Labor Statistics Web site).

Even by the highest estimates — which include people discouraged from looking for a job, thus not registered as unemployed — the jobless rate reached around 16 to 17 percent. It’s a jobs disaster, to be sure, but not the same scale as the Great Depression.

Third, in the 1930s the credit system shrank sharply. In large part this is because banks failed in an uncontrolled manner — largely in panics that led retail depositors to take out their funds. The creation of the Federal Deposit Insurance Corporation put an end to that kind of run and, despite everything, the agency has continued to play a calming role. (I’m on the F.D.I.C.’s newly created systemic resolution advisory committee, but I don’t have anything to do with how the agency handles small and medium-size banks.)

But the experience at the end of the 19th century was also quite different from the 1930s — not as horrendous, yet very traumatic for many Americans. The heavily leveraged sector more than 100 years ago was not housing but rather agriculture — a different play on real estate.

There were booming new technologies in that day, including the stories we know well about the rapid development of transportation, telephones, electricity and steel. But falling agricultural prices kept getting in the way for many Americans. With large debt burdens, farmers were vulnerable to deflation (a lower price level in general or just for their products). And before the big migration into cities, farmers were a mainstay of consumption.

According to the National Bureau of Economic Research, falling from peak to trough in each cycle took 11 months between 1945 and 2009 but twice that length of time between 1854 and 1919. The longest decline on record, according to this methodology, was not during the 1930s but rather from October 1873 to March 1879, more than five years of economic decline.

In this context, it is quite striking — and deeply alarming — to hear a prominent Republican presidential candidate attack Ben Bernanke, the Federal Reserve chairman, for his efforts to prevent deflation. Specifically, Gov. Rick Perry of Texas said earlier this week, referring to Mr. Bernanke: “If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — er, treasonous, in my opinion.”

In the 19th century the agricultural sector, particularly in the West, favored higher prices and effectively looser monetary policy. This was the background for William Jennings Bryan’s famous “Cross of Gold” speech in 1896; the “gold” to which he referred was the gold standard, the bastion of hard money — and tendency toward deflation — favored by the East Coast financial establishment.

Populism in the 19th century was, broadly speaking, from the left. But now the rising populists are from the right of the political spectrum, and they seem intent on intimidating monetary policy makers into inaction. We see this push both on the campaign trail and on Capitol Hill — for example, in interactions between the House Financial Services Committee, where Representative Ron Paul of Texas is chairman of the monetary policy subcommittee, and the Federal Reserve.

The relative decline of agriculture and the rise of industry and services over a century ago were long believed to have made the economy more stable, as it moved away from cycles based on the weather and global swings in supply and demand for commodities. But financial development creates its own vulnerability as more people have access to credit for their personal and business decisions. Add to that the rise of a financial sector that has proved brilliant at extracting subsidies that protect against downside risk, and hence encourage excessive risk-taking. The result is an economy that is at least as prone to big boom-bust cycles as what existed at the end of the 19th century.

The rise of the Tea Party has taken fiscal policy off the table as a potential countercyclical instrument; the next fiscal moves will be contractionary (probably more spending cuts), whether jobs start to come back or not. In this situation, monetary policy matters a great deal, and Mr. Bernanke’s focus on avoiding deflation and hence limiting the problems for debtors does not seem inappropriate (for more on Mr. Bernanke, his motivations and actions, see David Wessel’s book, “In Fed We Trust“).

Mr. Bernanke has his flaws, to be sure. Under his leadership, the Fed has been reluctant to take on regulatory issues, continuing to see the incentive distortions of “too big to fail” banks as somehow separate from monetary policy, its primary concern. And his team has consistently pushed for capital requirements that are too low relative to the shocks we now face.

And the Federal Reserve itself is to blame for some of the damage to its reputation, although it did get a major assist from Treasury in 2008-9. There were too many bailouts rushed over weekends, with terms that were too generous to incumbent management and not sufficiently advantageous to the public purse.

But to accuse Mr. Bernanke of treason for worrying about deflation is worse than dangerous politics. It risks returning us to the long slump of the late 1870s.

Article source: http://feeds.nytimes.com/click.phdo?i=73500819e37f339b4b4e30239c3f500f

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Japanese Economy Signals Rebound From Earthquake

August 15, 2011 by Leave a Comment

Gross domestic product shrank at an annualized 1.3 percent rate in the three months ending June 30, posting three consecutive quarters of declines, the Cabinet office said Monday in Tokyo. The median forecast of 25 economists surveyed by Bloomberg News was for a 2.5 percent drop. Capital investment rose 0.2 percent, compared with a revised 1.4 percent decline in the first quarter.

The outlook for growth is at risk from the yen’s climb to near a postwar high, which threatens to hurt exporters like Toyota Motor and Sony at a time when a global slowdown may also cut demand for the nation’s products. The finance minister, Yoshihiko Noda, said he was ready to take “bold action” in currency markets if necessary.

“The headline number is better than expected, but it’s not like this is a strong number,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management in Tokyo. “The strengthening yen will start to weigh on exports and capital spending. We can expect positive growth in the third quarter, but the yen may damp that momentum.”

Toyota, the world’s biggest carmaker, expects to begin making up for lost output from the earthquake in September, one month earlier than previously announced, it said on Aug. 2. The company is hiring up to 4,000 temporary workers to help that effort.

A 15-yen change in the dollar-yen rate over the last year has “blown off” 300,000 yen, or $3,900, in profit on a $20,000 car, and a stronger yen has cut Toyota’s fiscal first-quarter operating profit by 50 billion yen, Takahiko Ijichi, the carmaker’s senior managing officer, said on Aug. 2.

A stronger currency makes Japanese products less competitive abroad and erodes overseas profits repatriated into yen.

“The exchange rate is at a level that has an extremely damaging effect on the Japanese economy,” Osamu Masuko, president of Mitsubishi Motors, said Aug. 4 after authorities intervened in the foreign-exchange market for the first time since March. “The resulting exchange rate still isn’t acceptable.”

Slower overseas growth may also weigh on demand for Japanese products. Tokyo Electron, the large maker of semiconductor equipment, cut its net income forecast for the year ending in March by 49 percent, to 34 billion yen ($442 million), citing lower-than-expected sales.

Consumer spending fell 0.1 percent in the April-June period from the previous three months, compared with a 0.6 percent drop in the first quarter, the report on Monday showed.

Most indicators from the quarter starting July 1 point to an economic rebound, with industrial production rising for three straight months since plunging in March. Companies are also forecasting they will raise output this month to make up for lost capacity resulting from the natural disaster, and sentiment among merchants exceeded levels from before the earthquake.

Japan and other Asia-Pacific markets were up in midday trading on Monday, helped partly by a short-selling ban on financial stocks in Europe.

The Nikkei 225 benchmark index in Tokyo rose 0.9 percent at midday. The Hang Seng index in Hong Kong was up 1.7 percent. The SP/ASX 200 index in Australia was up 1.7 percent.

In addition, United States stock futures were up about half a percent late Sunday night.

Article source: http://feeds.nytimes.com/click.phdo?i=561a6d3e220cafc01e6ff5bd9e3431bd

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Retail Sales Rise, but Consumer Sentiment Hits 30-Year Low

August 12, 2011 by Leave a Comment

Consumer sentiment worsened sharply in early August, falling to the lowest level in more than three decades, even though retail sales posted the biggest gains in four months in July, separate reports on Friday showed.

Consumer sentiment, which hit its lowest since 1980 when the economy was in recession, fell on fears of a stalled recovery combined with gloom from partisan bickering over government debt, the Thomson Reuters/University of Michigan’s consumer sentiment survey reported.

The preliminary August reading on the consumer sentiment index fell to 54.9 in early August, down from 63.7 in July, and has fallen for three months. The August reading was well below the median forecast of 63.0 among economists polled by Reuters.

However, retail sales climbed 0.5 percent in July, the biggest increase since March, after a revised 0.3 percent gain in June, according to the Commerce Department.

“People’s spending doesn’t always correspond with their mood,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Conn. “I doubt things are as weak as the sentiment readings suggest, but no doubt people will be cautious in August.”

High unemployment, stagnant wages and the protracted debate in Congress over raising the government debt ceiling alarmed consumers in the University of Michigan survey even before the downgrade of United States sovereign debt by Standard Poor’s. The consumer sentiment index registered most of the decline before the credit rating downgrade on Aug. 5.

“Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government’s role,” the survey director, Richard Curtin, said in a statement.

“This was more than the simple recognition that traditional monetary and fiscal policy measures were largely spent. It was the realization that the government was unable or unwilling to act,” Mr. Curtin added.

Bad economic times were expected by 75 percent of all consumers in early August, just below the record peak of 82 percent in 1980. Buying plans for household durables and vehicles declined in early August, falling back to their recession-level lows.

“Obviously this is quite an ugly number,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

“How could you have hopes for anything less than what we got, with the markets being in turmoil, the fear, and the U.S. being downgraded? It took the wind out of the stock market a bit, but I don’t think it will be that meaningful.”

However, retail sales in July posted the biggest gain since March, tempering fears that the nation’s economy might be slipping back into recession.

The 0.5 percent increase was in line with analysts’ forecasts and followed an upwardly revised 0.3 percent gain in June.

Excluding autos, sales increased 0.5 percent, well above forecasts for a 0.2 percent gain. The figures were bolstered by a 1.6 percent increase in gasoline station sales, in part reflecting the higher cost of fuel. Retail sales excluding autos, gasoline and building materials rose 0.4 percent.

In another report, the Commerce Department said business inventories rose slightly less than expected in June, suggesting firms remained cautious about future demand at the end of the second quarter. Inventories climbed 0.3 percent, after a downwardly revised 0.9 percent rise in May, the report said. Economists had expected a rise of 0.5 percent in June.

Article source: http://feeds.nytimes.com/click.phdo?i=84905b19bb7922574605f1dea461c96e

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India, Citing Inflation Fears, Raises Interest Rates

July 26, 2011 by Leave a Comment

The Reserve Bank of India raised its repo rate, the rate at which it lends money to commercial banks, by 0.5 percentage point, to 8 percent, its 11th increase since October 2009. Most analysts were expecting an increase of 0.25 point.

“Policy needs to persist with a firm anti-inflationary stance” to counter inflation of nearly 9 percent, the central bank said, noting that while economic growth had moderated, “there is no evidence of a sharp or broad-based slowdown as yet.”

The benchmark Nifty 50-stock index fell 1.9 percent Tuesday. The Indian rupee climbed modestly against the dollar.

The Reserve Bank of India’s move is likely to slow one of the fastest-growing major emerging economies at a time when growth also appears to be easing in developed economies like Europe, Japan and the United States. Policy makers in China, another major fast-growing emerging market, are also trying to cool the economy amid inflation concerns.

“We certainly have a far more hawkish central bank than we had six or seven months back, when there was a conscious effort to balance growth and inflation,” said Abheek Barua, chief economist at HDFC Bank, a large Indian lender.

The Indian economy expanded at a rate of 8.5 percent in its last fiscal year, which ended in March. Some analysts say growth could slow to 7.5 percent in the current business year. The central bank held to its own forecast of 8 percent growth on Tuesday.

In its statement, the central bank was clear that it remained focused on bringing down India’s inflation rate, one of the highest in the world. In May, India’s consumer price index climbed 8.7 percent from the same period a year earlier, down from 9.4 percent in April.

The central bank said it would like to limit inflation to 4 to 5 percent.

“Several indicators such as exports and imports, indirect tax collections, corporate sales and earnings, and demand for bank credit suggest that demand is moderating, but only gradually,” the central bank said. “As such, demand side inflationary pressures continue to prevail.”

The policy statement appears to put the central bank at odds with Indian fiscal policy makers, who have been emphasizing the need for faster growth and have suggested that inflation will soon subside.

Last week, the finance minister, Pranab Mukherjee, invited Indian reporters and editors to his office to offer assurances that the government’s reform agenda had not been paralyzed by a series of corruption scandals and that the economy would indeed grow 8.5 percent, down from a previous government forecast of 9 percent.

In its statement Tuesday, the central bank subtly sought to put the onus for the persistently high inflation on the government, saying it needed to do better in areas in which it has struggled to make progress.

“It is important to recognize that in the absence of appropriate actions for addressing supply bottlenecks, especially in food and infrastructure, questions about the ability of the economy to sustain the current growth rate without significant inflationary pressures come to the fore,” the Reserve Bank of India said.

Mr. Barua of HDFC Bank said the central bank appeared to believe that it had no choice but to act more forcefully, but he warned that the high interest rates could significantly slow the economy.

“It’s the monetary policy’s job to pick up the slack, which worked to a point,” he said. “But there is every possibility of monetary policy overdoing things.”

Article source: http://feeds.nytimes.com/click.phdo?i=676c19e0b13068e266e80d457764484f

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India Bumps Up Interest Rates to Cool Inflation

July 26, 2011 by Leave a Comment

MUMBAI — The central bank of India raised its benchmark interest rates more than expected on Tuesday, saying that it was far more concerned about inflation than it was about slowing growth.

The Reserve Bank of India raised its repo rate by 0.5 percentage points, to 8 percent, its 11th increase since October 2009. Most analysts were expecting an increase of 0.25 points.

“Policy needs to persist with a firm anti-inflationary stance” to counter inflation of nearly 9 percent, the central bank said, noting that while economic growth had moderated, “there is no evidence of a sharp or broad-based slowdown as yet.”

The benchmark Nifty stock index was down 1.6 percent in the early afternoon, after the central bank’s announcement. The Indian rupee climbed modestly against the dollar.

The Reserve Bank of India’s move is likely to slow one of the world’s fastest- growing major emerging economies at a time when growth also appears to be easing in developed economies like the United States, Japan and Europe. Policy makers in China, another major fast- growing emerging market, are also trying to cool the economy amid inflation concerns.

“We certainly have a far more hawkish central bank than we had six or seven months back, when there was a conscious effort to balance growth and inflation,” said Abheek Barua, chief economist at HDFC Bank, a large Indian lender.

The Indian economy expanded at 8.5 percent in its last fiscal year, which ended in March. Some analysts say growth could slow to 7.5 percent in the current business year. The central bank held to its own forecast of 8 percent growth on Tuesday.

In its statement, the central bank was clear that its main focus remains on bringing down India’s inflation rate, one of the highest in the world. In May, India’s consumer price index climbed 8.7 percent from the same period a year earlier, down from 9.4 percent in April.

The central bank said it would like to limit inflation to between 4 percent and 5 percent.

“Several indicators such as exports and imports, indirect tax collections, corporate sales and earnings and demand for bank credit suggest that demand is moderating, but only gradually,” the central bank said. “As such, demand side inflationary pressures continue to prevail.”

The Reserve Bank of India’s policy statement appears to put it at odds with Indian fiscal policy makers, who have been emphasizing the need for faster growth and have suggested that inflation would soon subside.

Last week, the country’s finance minister, Pranab Mukherjee, invited Indian reporters and editors to his office to offer assurances that the government’s reform agenda was not paralyzed by a series of corruption scandals and that the economy would indeed grow 8.5 percent, down from a previous government forecast of 9 percent.

In its statement on Tuesday, the central bank subtly sought to put the onus for the persistently high inflation on the government, saying that the country needed to remove bottlenecks in the food supply, improve its infrastructure and lower its fiscal deficit — areas in which the government has struggled to make progress.

“It is important to recognize that in the absence of appropriate actions for addressing supply bottlenecks, especially in food and infrastructure, questions about the ability of the economy to sustain the current growth rate without significant inflationary pressures come to the fore,” the Reserve Bank of India said.

Mr. Barua of HDFC Bank said the central bank appears to believe that it has no choice but to act more forcefully, but he warned that the high interest rates could significantly slow the Indian economy.

“It’s the monetary policy’s job to pick up the slack, which worked to a point,” he said. “But there is every possibility of monetary policy overdoing things.”

Article source: http://www.nytimes.com/2011/07/27/business/global/india-bumps-up-interest-rates-to-cool-inflation.html?partner=rss&emc=rss

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Bucks: Leasing a Car? It May Have Hidden Value

June 24, 2011 by Leave a Comment

The common wisdom is that it’s more expensive to lease a car than to buy one. But the recent rise in used-car prices may provide a lucrative opportunity for those with leases to come out ahead of the game.

That’s because dealers set a so-called residual price when they lease a car — what the car is expected to be worth at the end of the lease. Typically, consumers can either turn their car in when the lease is up, or buy the car for the residual value. (If they want to buy it before the lease is up, the price is called the buyback amount.)

Now, with a spike in used-car prices as a result of tight supply, it’s likely that many residual values are significantly lower than the current market value of the car. That means that people whose leases are ending now — or who want to exit their lease early — can expect a good deal if they buy the car, or can even turn a tidy profit by selling the car themselves and pocketing the difference.

An article published Friday describes a Prius owner who did just that: Spencer Hunter, an Oregon lawyer, tells how he sold his Prius less than 72 hours after he posted an ad on Craigslist. Over the 13 months he leased his 2010 Prius, Mr. Hunter said he spent $3,860 on the car, not including gas. Last month, after buying out the lease and selling the car, he ended up with a check for $3,900 — a profit of $40.

Michael Bor, co-founder of a new used-car consignment business called CarLotz, which helps owners sell their cars for a fee, says other leases may also have residual values that are worth much more. “Not until recently have used-car values appreciated so much,” he said.

During the economic downturn, new-car sales — and the trade-ins that often accompany them — slowed sharply, so there are now fewer used cars available for sale. Roughly 60 percent of new-car sales involve trade-ins, said Paul Taylor, chief economist for the National Automobile Dealers Association. (The current situation is the reverse of what happened from 2005 to 2007, when there was a boom in new-car sales, and trade-ins flooded dealerships with used cars.)

Given the rise in used-car prices, it’s probable that forecasts for residual values made over the last three to five years, the typical duration of auto leases, were low. “What’s likely to happen now is they underestimated the value of the car,” Mr. Taylor said. “So the residual price is low, and you have more incentive to purchase it. Or, buy it and then sell it.”

Mr. Bor is in favor of selling. In the past, he said, if you turned your car in at the end of a lease, you weren’t giving up much value. “Today, if you hand the car over, you might as well put a suitcase full of hundreds in the trunk.”

He gives the example of his wife’s car, a 2008 Volvo XC90. Her lease has more than a year left, and when they called the finance company this week, they were given a buyout price of $18,500. She could arrange to sell it privately, he said, for about $27,000, based on values found at online sites like Autotrader.com, and industry sources like Manheim. She could then pay off the balance and keep the $8,500 difference, or use part of it for a down payment for another car. Prices vary geographically, and by model (prices have risen the most on smaller, fuel-efficient models), so her case is perhaps an extreme example, he said. But it’s likely that residual values on many leases offer significant “hidden” savings.

Car leasers may be catching on to the idea. According to CNW Marketing Research, an Oregon company that follows car trends, 21.8 percent of car leasers are now buying their vehicles, up from a historic average of 16.4 percent. Of those who buy the leased car, nearly 40 percent sell it within six months, compared with 27.3 percent historically, CNW said.

Typically, the car’s residual value is listed on the lease documents. Or you can call the finance company for a payoff amount, if you still have time on your lease. The market for used cars is brisk right now, but if you go the sell-it-yourself route, Mr. Bor said, you should start planning to do so at least a month or two before your lease expires.

The downside, of course, is that selling the car yourself, instead of simply handing over the keys to the dealer, requires a significant investment of time and energy that many people don’t want to make. Many dread the hassle of advertising the car on Craigslist or other online sites and dealing with strangers who want to test-drive it.

That’s where Mr. Bor sees an opportunity for his business, which recently opened its first location near Richmond, Va. CarLotz sells the car for fees and a commission totaling about $800; the seller keeps the rest. Out-of-state sellers can ship him cars to sell and still make a profit, even with the fee, he claims, because prices are so high.

Do you lease a car? Is its market value greater than its buyback value?

Article source: http://feeds.nytimes.com/click.phdo?i=04c29bfbbce9424c95e4810ceb258a83

Filed Under: Your Money Tagged With: , ,

Markets Turn Up Sharply After Release of Retail Data

June 14, 2011 by Leave a Comment

In the United States, an indicator of consumer purchasing from the Department of Commerce showed that overall retail sales in May declined by 0.2 percent, a smaller decline than the 0.5 percent fall that had been forecast by analysts surveyed by Bloomberg. The figure was a reversal of the 0.3 percent rise in April, and it was the first monthly decline after 10 consecutive increases.

When gasoline sales are excluded, retail sales fell by 0.3 percent, according to the government figures, also the first time this year that figure turned negative.

“The recent trajectory of consumer spending excluding the gasoline category is cause for concern,” said Joshua Shapiro, the chief United States economist for MFR Inc. “With higher gas prices eating into the income available for discretionary spending, the consumer faces stiff headwinds. This underscores how absolutely key it is that the labor market continue to improve.”

Analysts suggested that the markets on Tuesday were propelled partly on economic data from China that pointed to an increase in industrial output and a rise in consumer prices that was in line with forecasts.

Keith B. Hembre, the chief economist and chief investment strategist at First American Funds, said the data from China was “not a big downside surprise” and led to stronger market sentiment in Asia and Europe that was passed on to the United States.

“It is a pretty powerful relief rally,” he said.

The Dow Jones industrial average closed up 123.14 points, or 1.03 percent, to 12,076.11. The Standard Poor’s 500-stock index rose 16.04 points, or 1.26 percent, to 1,287.87. The Nasdaq composite index average climbed 39.03 points, or 1.48 percent, to 2,678.72.

The stock market in the United States had risen slightly on Monday after six weeks of losses partly fueled by concerns over the pace of the global and domestic economic recovery, and concerns over euro zone sovereign debt challenges.

Another issue that has been lingering in the markets has been the protracted political wrangling over the national debt ceiling in the United States. Moody’s Investors Service said earlier this month that it might downgrade the United States credit rating if lawmakers did not raise the ceiling “in coming weeks.”

On Tuesday, the chairman of the Federal Reserve, Ben S. Bernanke, warned about the consequences of a continued delay, saying even a short suspension of payments on principal or interest on the Treasury’s debt obligations could cause severe disruptions in financial markets.

“In debating critical fiscal issues, we should avoid unnecessary actions or threats that risk shaking the confidence of investors in the ability and willingness of the U.S. government to pay its bills,” Mr. Bernanke said in a speech in Washington.

He also said that interest rates soar as investors lose confidence, as seen in a number of countries recently.

“Although historical experience and economic theory do not show the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory is moving us ever closer to that point,” he said.

Still, the stock market had little discernible reaction to the remarks and surged throughout the day.

Among the leading shares was the Best Buy Company, which rose more than 4 percent after reporting net earnings of $136 million, or $0.35 a diluted share, for its fiscal first quarter ended May 28. That compared with $155 million, or $0.36 a diluted share, for the same period in 2010.

On the Dow, Caterpillar was up 2.79 percent, Home Depot rose more than 4 percent and Intel rose more than 2 percent. “The markets have been in a corrective stage, and I think we have reached levels now that perhaps we can see some renewed interest in terms of valuations,” said Peter Cardillo, the chief market economist for Avalon Partners.

Mr. Cardillo said the United States data was “not that bad,” reflecting the impact on consumer prices from higher gasoline prices and the situation in Japan.

“None of them suggest that we are headed for a double-dip recession,” Mr. Cardillo added.

Another economist noted that the retail sales data and other reports Tuesday painted a “disappointing picture” of the domestic economy.

Steven Ricchiuto, the chief economist for Mizuho Securities USA, cited a National Federation of Independent Business consumer confidence index and a government report that said wholesale prices rose in May.

“Small business optimism continues to remain in recession territory with no sign of firming, while consumers continue to consolidate spending even after energy prices have eased,” he said in a research note

The Producer Price Index, which reflects commodity prices for manufacturers, rose 0.2 percent in May, according to seasonally adjusted figures provided by the Bureau of Labor Statistics. The increase was slightly higher than the 0.1 percent rise forecast by analysts, and it came in below the 0.8 percent rise in April.

The May increase in the finished goods index was attributed mostly to prices for finished energy goods, which rose 1.5 percent, the eighth consecutive monthly advance. The food component of the index declined 1.4 percent.

The core index for finished goods, which excludes the volatile energy and food components, also rose 0.2 percent, in line with forecasts and slightly less than 0.3 percent rise in April, the government figures showed. It was the sixth consecutive rise in the core producer prices index.

Gasoline prices moved up 2.7 percent in May, the statistics showed.

When calculated on a year-over-year basis, the total finished goods index was 7.3 percent higher in May.

Article source: http://feeds.nytimes.com/click.phdo?i=a42e8e17f4b2a38bb643cdbc9a20cd53

Filed Under: Business News Tagged With: , ,

Israeli Economist Enters Race to Lead I.M.F.

June 13, 2011 by Leave a Comment

A globally renowned economist who is credited with stabilizing the Israeli shekel during his six years as head of the country’s central bank, Mr. Fischer also spent seven years as first deputy managing director of the I.M.F., and knows the organization well.

“It was because of this experience that I decided to stand,” Mr. Fischer said in a statement Saturday.

But despite Mr. Fischer’s qualifications, even he seemed to acknowledge that he has only a slim chance of being chosen over the front-runner, Christine Lagarde, the French finance minister. Agustín G. Carstens, the governor of Mexico’s central bank, is also campaigning for the job.

“An extraordinary and unplanned opportunity has come up, possibly one that will not come again,” Mr. Fischer said in his statement. He decided to pursue the I.M.F. job, he said, “despite the process being complicated and despite the possible barriers.”

Mr. Fischer had a distinguished academic career before entering public service, writing numerous economics textbooks and serving as head of the economics department at the Massachusetts Institute of Technology. He was also chief economist at the World Bank from 1988 to 1990. He has private sector experience as a vice chairman of Citigroup from 2002 to 2005, when he became governor of the Bank of Israel.

“On the basis of his qualifications he is as serious as either of the other two candidates,” said Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y. “The work he has done in stabilizing the Israeli economy and stabilizing prices is viewed as a textbook application of monetary policy.”

Still, the obstacles to Mr. Fischer’s candidacy are formidable. As he acknowledged in his statement, at 67 he already exceeds the age limit of 65 for candidates for managing director, meaning a change in I.M.F. rules would be necessary for him to be elected by the 187 countries that participate in the selection.

With joint United States and Israeli citizenship, Mr. Fischer’s passports work against him. By informal arrangement, the United States has supplied the head of the World Bank, while the head of the I.M.F. has come from Europe. In addition, Arab countries might object to an Israeli in the I.M.F. post.

“Stan Fischer would make an excellent I.M.F. managing director. But, at this late stage, he does not have enough support to succeed,” the economist Nouriel Roubini told Reuters. Mr. Fischer was voted most suited to run the I.M.F. in a Reuters poll of economists.

Its executive board has set a June 30 deadline for selecting a successor to Dominique Strauss-Kahn, who resigned as I.M.F. managing director last month after being accused of sexually assaulting a hotel maid in New York.

Ms. Lagarde is highly regarded for her negotiating skills, and has the strong support of Germany, where she enjoys a warm working relationship with Wolfgang Schäuble, the finance minister. The fact that she is a woman might also help restore the reputation of the I.M.F. after the arrest of Mr. Strauss-Kahn, who denies the charges against him.

Though she is the front-runner, Ms. Lagarde faces abuse of power charges for her intervention in a court case involving a French tycoon. A French court moved on Friday to postpone a decision on the investigation, removing an immediate hurdle to Ms. Lagarde’s candidacy but leaving her open to possible future legal proceedings.

Ms. Lagarde has been on a worldwide tour of countries including Brazil, India and China in what appears to be a successful campaign to win support from developing nations, some of which had said it was time for someone from a poorer country to manage the I.M.F.

“Everybody is free to file a candidacy,” Ms. Lagarde told reporters in Cairo on Sunday, after meeting with the Egyptian finance minister, Samir Mohamed Radwan, about her own bid, Bloomberg News reported. She noted that Mr. Fischer is experienced, Bloomberg said.

Russia has also nominated Grigori A. Martchenko, Kazakhstan’s central bank president.

The deadline for nominations was Friday. Mr. Fischer did not say when he had submitted his name.

The I.M.F. assists countries in overcoming financial crises, but typically makes loans contingent on harsh austerity measures.

Strong political skills are crucial for the I.M.F. managing director, which would seem to be another factor in Ms. Lagarde’s favor. However, Mr. Weinberg of High Frequency Economics noted that Mr. Fischer was able to cope with Israel’s fractious politics while pushing for fiscal discipline and cutting inflation.

In Israel, Yuval Steinitz, the finance minister, on Sunday said that the country would back Mr. Fischer’s candidacy, but also gave him little chance of being chosen.

“First there is the age obstacle,” Mr. Steinitz told Israel’s Army Radio during an interview Sunday. “And the choice is very much political. Were it purely professional it would be hard-pressed to find a better person than Fischer.”

In a 1987 paper with parallels to the current debt crisis in some European nations, Mr. Fischer argued in favor of debt relief for countries in Africa and Latin America. The overly indebted countries had “performed miracles” to try to service their debts, he wrote in The American Economic Review.

“But the price in terms of growth has been heavy,” he said. “The time for debt relief has arrived.”

Judy Dempsey and Caroline Brothers contributed reporting.

Article source: http://www.nytimes.com/2011/06/13/business/global/13fischer.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,
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