September 30, 2022

I.M.F. Cuts Global Growth Forecast

In its mid-year health check of the world economy, the Washington-based lender also warned global growth could slow further if the pull-back from massive monetary stimulus in the United States triggers reversals in capital flows and crimps growth in developing countries.

The IMF shaved its 2013 forecast for global growth to 3.1 percent, as fast as the economy expanded last year and below the Fund’s 3.3 percent projection in April. It also lowered its forecast for 2014 to 3.8 percent after earlier predicting a 4 percent expansion.

The Fund has trimmed its growth forecast for 2013 in every major report since April 2012 after initially projecting the global economy would expand by as much as 4.1 percent this year, a sign of the unexpectedly bumpy recovery from the global financial crisis.

In an update of its World Economic Outlook report, the IMF said it underestimated the depth of the recession in Europe, and had not expected the United States to go ahead with growth-stunting spending cuts.

Emerging markets, which had previously been the engine of the global recovery, added to the overall subdued picture in the latest outlook, entitled “Growing Pains.” The IMF cut its 2013 growth forecast for developing countries to 5 percent, including a lower forecast for China, Brazil, Russia, India and South Africa, often called the BRICS.

The Fund said China’s slowdown was a particularly big risk, as the world’s second-largest economy navigates a shift to consumption-led growth. Any slowdown could hit commodity exporters, as China is one of the world’s biggest energy consumers.

“After years of strong growth, the BRICS are beginning to run into speed bumps,” said Olivier Blanchard, the IMF’s chief economist. And while growth in emerging countries has slowed, inflation has not fallen with it, suggesting the economies are already growing close to their potential, he said.

“This has an important implication: that growth in emerging markets will remain high, but maybe substantially lower than it was before the crisis.”

A top Goldman Sachs strategist last week said investors are set to pay a hefty price for betting too much on the developing world, where countries from China to Brazil are dealing with tamped-down growth expectations and the chance of social unrest.

“Risks of a longer growth slowdown in emerging market economies have now increased due to protracted effects of domestic capacity constraints, slowing credit growth, and weak external conditions,” the IMF said.

The Fund said it also assumed recent volatility in financial markets was a temporary reaction to lower growth in emerging countries and uncertainty about when the U.S. Federal Reserve would start to pull back from its bond-buying program.

“But one cannot rule out further acts of nerves along the way,” Blanchard said.

The IMF predicted the euro area would remain in recession this year, with the currency bloc’s economy contracting 0.6 percent, before recovering slightly to expand just under 1 percent next year.

In its annual health check of the euro zone economy on Monday, the IMF said the region must take coordinated action to revive economic growth.

The IMF also trimmed its forecasts for U.S. growth this year to 1.7 percent, a more pessimistic outlook than what the White House predicted on Monday, due to continued pain from deep government spending cuts.

However, it raised its forecast for Japan. It now expects Japan’s economy to grow 2 percent this year on the back of its monetary stimulus, which boosted confidence and private demand. It previously predicted Japan would grow 1.6 percent this year.

But the Fund said Japan’s new economic strategy, known as “Abenomics,” also poses risks for the world, as investors could lose confidence if Japan does not implement structural reforms.

The IMF also increased its projection for growth in Britain to 0.9 percent this year from its previous prediction of 0.7 percent, welcome news for British Chancellor George Osborne who clashed earlier this year with the Fund over its suggestion that it was time for him to ease up on austerity.

The Fund said it still remained concerned about Britain’s weak recovery.

(Reporting by Anna Yukhananov; Editing by Andrea Ricci and James Dalgleish)

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Fundamentally: The Markets and Greece: Variations on a Theme

HOW worried are investors about Greece’s financial mess? Could it take a huge toll on Europe and upend the global recovery? A standard way to answer such questions is to turn to the financial markets, which are often thought to reflect and foreshadow the underlying health of the economy.

Yet in recent weeks, the stock, bond and currency markets have seemed to be painting different pictures about the severity of the threat.

Until last week, bond market investors were racing feverishly into 10-year Treasuries amid growing signs that Greece was on the brink of defaulting on its debt. The market calmed down last week, though, upon learning that the Greek government had agreed to make sharp spending cuts and would be receiving billions in debt relief from Europe.

Even with this news, though, yields on those Treasuries have still fallen from 3.62 percent in April to 3.20 percent now — not far from where rates were in the depths of the financial crisis in late 2008.

In the stock market, investors have responded more quietly. Although the Standard Poor’s 500-stock index had been slumping for more than two months, stock prices recovered last week, and the S. P. is now down only around 2 percent from its April peak.

And currency markets haven’t panicked at all. More than a year ago, when Greece’s fiscal troubles first hit the headlines, the euro plummeted nearly 20 percent against the dollar. This time around, though, the euro has dropped only around 2 percent.

These messages may seem confusing. But upon further examination, all of these markets are probably pointing to the same thing, said Michael J. Cuggino, manager of the Permanent Portfolio, a mutual fund that invests in stocks, bonds, currencies and alternative assets.

Mr. Cuggino summarizes the global outlook this way: “It’s unmistakable that the economy is slowing, but it won’t be a material slowdown, and growth will probably resume in the second half of the year.”

Consider the bond market. While it’s true that Treasury yields nearly sank to November 2008 levels, the reason may not be all that ominous. “In terms of depth and breadth, there are really just two big buckets of government bonds in the world — Treasuries and European bonds,” said Carl P. Kaufman, co-manager of the Osterweis Strategic Income fund. To some extent, what we have seen is “a flight to safety from one bucket to the other,” he said.

Mr. Kaufman noted that until last week, the flow of money from European bonds to Treasuries had been especially pronounced among shorter-term securities. As much as yields on 10-year Treasuries fell, he noted that rates on two-year notes fell faster, dropping as low as 0.35 percent, from 0.85 percent in April. That’s mainly because investors fleeing the European market were “simply looking for a short-term place to park their cash,” he said.

But those yields reversed course last week; the two-year yield is now at 0.49 percent, and the so-called yield curve — a term that describes the spectrum or interest rates paid out by bonds of varying maturities — had steepened slightly. “Historically, steep yield curves signal recoveries,” Mr. Kaufman said.

George Strickland, a portfolio manager and managing director at Thornburg Investment Management in Santa Fe, N.M., agrees. “I’d be much more concerned if the yield curve had flattened — that would be a very bearish signal for all risk markets.”

He said that while Treasury yields did fall to near financial-crisis levels, the credit markets haven’t been experiencing the liquidity problems of a few years ago. For instance, he said, companies are not having problems rolling over commercial paper, a form of short-term debt that companies use to fund their basic obligations.

How should we interpret the relative stability in the currency market?

David C. Wright , managing director of Sierra Investment Management in Santa Monica, Calif., said that “it’s been somewhat surprising that we haven’t seen more stress on the euro.” But we’re still in the early stages of the crisis, he said. And market strategists say that other factors are probably also at work.

Harry W. Hartford, president of Causeway Capital Management in Los Angeles, recalled that when the euro plunged a year ago, there were concerns about whether a common currency could be sustained. Such fears put even more pressure on the euro. But this time around, the currency’s relative stability probably reflects confidence “that the euro will be sustained by policy makers and politicians,” he said.

Mr. Hartford added that the more muted reaction in currency markets might reflect the view that because Greece accounts for only around 2.5 percent of the euro zone’s gross domestic product, its troubles can be contained. “In the grand scheme of things, assuming this crisis doesn’t spread, it’s not a massive issue,” he said.

Of course, if it does spread — to Ireland and Portugal and beyond — all bets on the euro are off. And the debate about the health of the recovery will start anew.

Paul J. Lim is a senior editor at Money magazine. E-mail:

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Setbacks for Samsonite and Prada I.P.O.’s in Hong Kong

Prada, the Italian luxury fashion house, lowered the price guidance for its listing in Hong Kong amid feeble demand from retail investors, a person with direct knowledge of the matter said Thursday.

And shares in Samsonite, the luggage maker that was founded in the United States 101 years ago, fell sharply on their first trading day in Hong Kong, becoming the latest in a string of global offerings to see a poor market debut.

Meanwhile, widespread selling across the Asia-Pacific region sent several key stock indexes down by more than 1.5 percent.

The global market sell-off had started on Wednesday, as protests and an imminent cabinet reshuffle in Athens once again fueled fears that Greece’s debt crisis would escalate and spread. On Wall Street, the Dow Jones industrial average fell 1.5 percent on Wednesday.

Asian markets followed suit on Thursday, with a 1.9 percent drop in Australia and South Korea. The Hang Seng in Hong Kong declined 1.8 percent.

The Nikkei 225 in Japan sagged 1.7 percent, the Taiex in Taiwan dropped 2 percent and stocks in mainland China fell 1.5 percent.

“There has been a complete loss of confidence,” said Francis Lun, managing director at Lyncean Holdings in Hong Kong. “With Greece on the verge of default, there are now fears that there will be a wider financial crisis.”

Greece’s woes and worries about the momentum of the global recovery have been weighing on financial markets for months.

In many of the fast-growing emerging nations, inflation pressures and rising interest rates are adding to investor nervousness. On Thursday, India raised its key interest rate for the 10th time since early last year.

Likewise, the authorities in mainland China have been reining in bank lending for the past 18 months, as well as raising interest rates. Another rate increase is widely expected to come within weeks as Beijing continues its battle to contain inflation.

“Liquidity is being squeezed by the government’s determination to bring down property prices and tighten rates,” Mr. Lun said.

Stock markets in the Asia-Pacific have performed poorly this year as a result. Most key indexes in the region are now below where they began the year, and several stock market debuts have performed poorly. Some companies have even shelved their public offerings as a result.

The weak market sentiment on Thursday prompted Prada, whose high-end handbags and apparel are popular with Asia’s increasingly affluent shoppers, to lower its price range to between 39.50 and 42.25 dollars, from a previously announced range of 36.50 to 48 dollars, according to a person with direct knowledge of the listing, who spoke anonymously because the information was not yet public.

A price at the upper end of the lowered range would bring Prada $2.3 billion, from the previous maximum of $2.6 billion. Prada is due to price its shares on Friday and start listing on the Hong Kong exchange on June 24.

Meanwhile, shares in Samsonite, which had been only moderately oversubscribed, dropped as much as 10.6 percent early in the day. Although they clawed back some of those losses later on, the shares were well below the issue price of 14.5 Hong Kong dollars, or $1.86, by late afternoon, closing at 13.38 dollars, down 7.7 percent.

Samsonite, which was bought by the British private equity firm CVC Capital Partners in 2007, had previously been forced to price its shares at the lower end of its indicative range, bringing it proceeds of $1.25 billion, rather than the maximum $1.5 billion it had hoped for.

Still, the decisions by companies like Samsonite and Prada to seek a listing in the Asian financial hub, rather than on an exchange closer to home, reflect an the overall shift in the center of economic and financial gravity toward fast-growing countries in Asia.

About a dozen non-Asian companies are aiming to list in Hong Kong this year in a bid to tap a cash-rich investor base and to raise their visibility in what is a key market for their goods.

“We feel at home here,” said Tim Parker, the Samsonite chief executive, amid a clatter of camera shutters at a listing ceremony at the Hong Kong stock exchange on Thursday, adding that the company planned to build its business in China, India and other parts of Asia.

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Global Airline Group Cuts 2011 Profit Forecast

SINGAPORE — Global airlines cut their 2011 profit forecast Monday by more than half, to $4 billion, as high oil prices and turmoil in Japan, North Africa and the Middle East weigh on the industry’s recovery.

The International Air Transport Association, which represents most global carriers, also warned of a looming trade war if Europe moves ahead with plans to force airlines to join an emissions trading program next year.

Under the Emissions Trading Scheme, the European Union would force carriers to buy permits for each ton of carbon dioxide they emit above a certain cap. The Union has offered to exempt airlines based in countries that can prove they are taking equivalent steps to cut emissions.

Representatives from developing countries criticized the proposed rules as unfair.

“We do not have the same level of sophistication or maturity in trading of carbon credits, and therefore any such new policy or levy on Indian carriers flying to Europe would be unfair,” said Vijay Mallya, chairman of Kingfisher Airlines of India. “Now it’s a government-to-government matter, not an airline-specific matter.”

The China Air Transport Association contended that the program would cost Chinese airlines more than $100 million in the first year and more than triple that by 2020.

“I believe we have to take legal action,” said Wei Zhenzhong, secretary general of the group, adding that Air China was preparing a legal challenge. The U.S. industry group, the Air Transport Association of America, is also challenging the plan in E.U. courts.

Airlines have said that the program, designed to tackle growing emissions from the aviation industry, would only increase costs and add to pressures already caused by the sluggish global recovery.

“The efficiency gains of the last decade and the strengthening global economic environment are balancing the high price of fuel,” the international association’s director general, Giovanni Bisignani, said at the group’s annual meeting in Singapore.

“But with a dismal 0.7 percent margin, there is little buffer left against further shocks,” he said.

The association’s $4 billion profit forecast compares with the $8.6 billion forecast March 2, just before an earthquake and tsunami in Japan led to a crisis at a nuclear power station. Since then, the uprisings in the Middle East and North African have spread, and oil prices have reached well above $100 a barrel.

The new forecast would also mark a drop of more than three-quarters from the industry’s estimated 2010 profit, which was raised to $18 billion from $16 billion.

Economists say the industry’s outlook is a guide to the strength of cyclical recovery in developed markets and growth in emerging economies, which rely heavily on air transportation.

Airlines rebounded faster than expected from recession last year, helped by higher traffic and a drive to keep a lid on spare capacity. But a far too rapid expansion in capacity, a series of external shocks and higher oil prices have hit the industry hard this year.

The International Air Transport Association is forecasting an average oil price in 2011 of $110 per barrel, up nearly 15 percent from $96 last year, adding to the incentive for airlines to raise fares or fuel surcharges to cover the rising cost of doing business.

Qantas Airways was “looking at more increases going forward,” its chief executive, Alan Joyce, said in an interview. “Hedging just gives you time.”

The international group also warned that capacity was set to expand 5.8 percent in 2011, outstripping a 4.7 percent increase in demand.

Mr. Bisignani has said that a lack of discipline could dent the industry’s recovery as airlines jostle for market share.

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