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US dragging feet, hoping inflation will help its housing market recover

BROAD inflation measures are understating the long-term threat of rising prices worldwide and policymakers are not acting fast enough, said HSBC group chief executive Michael Geoghegan.

Most governments and central bankers are ‘not facing up’ to the danger of inflationary expectations becoming entrenched, he said. ‘I think it’s going to be a long-term problem because I don’t think there’s a long-term will to solve it.’

Faced with higher household expenses on utilities and food, workers in some countries have already demanded sharp wage increases recently, he said.

This has in turn saddled businesses with higher costs that may result in further increases in the prices of goods and services - the start of a vicious cycle that could spiral out of control.

‘I do believe that to a very large degree, the inflation numbers that we see coming out of various central banks don’t reflect the underlying rate of growth in household expenditure,’ he said. ‘It’s easy to say inflation is slowing, but if costs have risen 30, 40, 50 per cent, saying inflation is slowing doesn’t achieve anything.’

Mr Geoghegan, who is usually based at HSBC’s headquarters in London, was speaking to a group of business leaders at a lunch organised by the Asia Society in Hong Kong earlier this week . ‘In the short term, it will need an increase in interest rates and I’m not sure governments have the courage to do that. I would urge them to, because inflation not controlled is very difficult to control later and I do hope governments will face up to that.’

One reason central banks are reluctant to raise interest rates - at least in the United States - is that higher inflation would help the US housing market recover more rapidly, he said. ‘In the short term that will benefit the US real estate market, because the cost of replacing homes will rise quite quickly.’

Since last September, the US Federal Reserve has slashed its key interest rate by 3.25 percentage points in a rapid succession of rate cuts to 2 per cent, in an attempt to steer the faltering US economy away from recession. Comments last week by Fed vice-chairman Donald Kohn suggested the US central bank is hoping to pause the rate cuts at its next policy meeting on June 24, but analysts do not expect rates to be raised until the end of the year, after the US presidential elections in November.

Outside the US, many central banks have also been reluctant to raise interest rates for fear of hurting their own economies that are already facing slower growth from the US downturn. ‘At the moment, I don’t see any real commitment to raise interest rates,’ said Mr Geoghegan.

He also said that the US sub-prime mortgage crisis had exposed flaws in the way investment banks do business, which is likely to change with pressure from regulators and internal reforms. ‘The idea that groups of people with no core deposit base can raise large amounts of money and take the position as banks is probably something that we’ll see change over time. I think you’ll find that banks will lend and investment banks will advise, but they won’t do both.’

Securitisation - the business of repackaging pools of basic loans such as mortgages and credit card debt into other financial products such as collateralised debt obligations or CDOs - will change, too. ‘We need a very transparent securitisation industry . . . where it’s easy to understand the risk and show it to others’ instead of relying on the opinions of credit rating agencies, he said.

By CONRAD TAN
IN HONG KONG

Source : Business Times - 30 May 2008

(WASHINGTON) Treasury Secretary Henry Paulson will tell officials of Saudi Arabia and other Middle East oil producing nations that soaring oil prices are putting a ’significant burden’ on the global economy, a senior Treasury official said on Wednesday.

David McCormick, Treasury’s undersecretary for international affairs, said that Mr Paulson in an upcoming trip will be promoting increased foreign investment in oil production as a way of boosting supplies.

‘The key message that he will highlight is that record high oil prices are putting a significant burden on the global economy. They are also putting a significant burden on families and consumers, not just in the United States, but around the world,’ Mr McCormick said in a briefing to preview Mr Paulson’s weekend trip.

Mr McCormick said Mr Paulson would be urging ‘all countries to open up their oil markets to investment that boosts yields, exploration and production’.

He said that message would not be aimed at any specific country but to all oil producing nations because a significant number of them are ‘walled off to private investment’.

Mr Paulson will not make any specific request for nations to boost their production during the current period of soaring oil prices, Mr McCormick said.

On a trip to the Middle East earlier this month, President George W Bush said that a modest oil production increase by Saudi Arabia ‘doesn’t solve our problem’ because the United States must take its own actions in the energy area.

Mr Paulson’s first stop will be in Saudi Arabia for talks tomorrow with government officials and private sector investors.

He will also visit Qatar and Abu Dhabi and Dubai in the United Arab Emirates. He will deliver a major speech on the importance of open investment policies on Monday in Abu Dhabi.

While in Abu Dhabi, Mr Paulson will have a series of meetings with officials from large government investment funds, known as sovereign wealth funds. — AP

Source : Business Times - 30 May 2008

Figure raises hope of country avoiding recession despite housing crisis

(WASHINGTON) The US economy plodded ahead at a 0.9 per cent pace in the first quarter - slightly better than first estimated - but still underscoring caution on the part of consumers and businesses walloped by housing, credit and financial problems.

The new reading on gross domestic product, released by the Commerce Department yesterday, was an improvement from the government’s initial growth estimate for the January-to-March quarter as well as the economy’s performance in the final quarter of last year. Both periods were pegged at a 0.6 per cent growth rate.

Gross domestic product, or GDP, measures the value of all goods and services produced within the United States.

The first-quarter performance matched analysts’ forecasts and offered a somewhat encouraging sign because it showed that the economy was still growing at that time. The figure did not meet a definition of recession, which under a rough rule is two straight quarters of shrinking GDP, and might raise hopes that the country can dodge a full-blown downturn.

Fallout from the housing crisis continued to be a big drag on overall economic growth.

Builders slashed spending on housing projects by 25.5 per cent, on an annualised basis, in the first quarter. That was the most in 27 years.

Consumers - whose spending is the economy’s lifeblood - are feeling the pressure from the economy’s problems.

They increased spending at just a one per cent pace in the first quarter. That was the slowest since the last recession in 2001.

Businesses also showed some caution, cutting spending on equipment and software. However, investment in commercial construction was not as weak as the government had first estimated, contributing to the upward revision to first-quarter GDP.

One of the bright spots keeping the economy afloat in the first quarter was export growth. Exports grew at a 2.8 per cent pace, although that was not nearly as much as first estimated, they still were a force for GDP growth. The falling value of the US dollar has made US exports less expensive to foreign buyers.

In other economic news, more people signed up for jobless benefits last week, the latest sign of softness in the employment market. The Labour Department said that new applications filed for unemployment insurance rose by 4,000 to 372,000 last week. The increase left claims slightly higher than the 370,000 level that economists were expecting.

Looking ahead, top forecasters at the National Association for Business Economics predict that the economy will creep along at a 0.4 per cent growth rate during the April-to-June period, which is expected to be the weakest quarter of the year. — AP

Source : Business Times - 30 May 2008

THANKS to a deferred tax credit of $14.82 million, Stamford Land Corporation saw a 28.7 per cent rise in net profit to $42.94 million for the financial year ended March 31.

Stamford said the deferred tax credit arose from recognition of unrecorded tax losses carried forward as ‘the anticipated future taxable profit will allow the deferred tax assets to be recovered’.

Revenue for the year dipped 7.3 per cent to $276.1 million and pre-tax profit fell 14.6 per cent to $28.5 million as the group had a lower inventory of completed residential properties for sale compared with last year.

Earnings per share rose to 4.97 cents from 3.86 cents.

Its hotel segment achieved a 17 per cent increase in revenue to $232.2 million due to better occupancy and room rates and translation of revenue denominated in Australian dollars and New Zealand dollars into Singapore dollars at higher exchange rates.

The trading segment posted a 22.6 per cent growth in revenue to $14.82 million due to higher contribution from the group’s travel and interior decoration companies.

But growth in these segments was offset by a 66.8 per cent slump in revenue in the property development and investment segment to $28.96 million as fewer units of Stamford Marque remained for sale.

Stamford Land is optimistic about the outlook for the hotel industry in Australia in view of limited new hotel rooms coming on stream, likely further improvements in revenue per available room, and continued strength in the Australian dollar.

‘The group expects positive results from its hotel owning & management segment in the next reporting period and the next 12 months,’ it said.

On the residential front, Stamford Land said its Stamford Residences Auckland is expected to be completed in October this year and it will recognise income from the sale of this project accordingly.

It has pre-sold over 70 per cent of the Stamford Residences and Reynell Terraces, Sydney, which is scheduled for completion in August 2011.

‘The trading segment is expected to further improve on its performance on the back of the strong Singapore economy,’ it added.

Stamford Land has proposed a final dividend of 1.5 cents per share and a special dividend of one cent per share. It paid out an interim dividend of 1.5 cents per share on March 12.

Shares in Stamford Land closed trading yesterday at 67 cents, down one cent.

Source : Business Times - 30 May 2008

WASHINGTON - The United States economy grew at a revised 0.9 per cent annual rate in the first quarter, slightly better than previously thought because of lower demand for foreign goods and services and a pickup in non-residential building, the Commerce Department reported yesterday.

Growth in the January-March quarter was in line with economists’ expectations. The economy grew at a 0.6 per cent rate in the fourth quarter of last year.

‘The underlying domestic demand in the economy showed a slight improvement. It’s probably consistent with the Fed being on hold in June and several months after that,’ said Mr Nick Bennenbroek, a currency strategist with Wells Fargo in New York.

The upward revision to first-quarter growth and the inflation readings in the quarter are likely to provide some comfort to the Federal Reserve. The central bank has become increasingly concerned about rising prices amid slowing growth and has signalled that it may pause a string of interest rate cuts.

The Labour Department also reported that claims for new jobless benefits rose slightly more than expected last week, while the tally of those still drawing benefits hit its highest mark in more than four years. Initial claims for state unemployment insurance benefits rose to 372,000 last week from an upwardly revised 368,000 for the prior week.

The Commerce Department said imports of goods and services fell 2.6 per cent in the first quarter. But exports, a recent source of strength for the economy, also were weaker than first thought, with the first-quarter figure revised to an increase of 2.8 per cent from a 5.5 per cent rise.

The Dow Jones Industrial Average rose 3.74 points, or 0.03 per cent, to 12,597.77 in early trading. - REUTERS
 
Source : Straits Times - 30 May 2008