Business Day

Bank says indications are that the downward trend inflation will continue, but warns that tight monetary policy will remain

Economics Correspondent

MOST economists expected interest rates to be cut by June as a result of a positive inflation outlook, but the Reserve Bank's Monetary Policy Review released yesterday suggests that tight monetary policy may be a feature for another few months.

The Bank says the inflation outlook has improved "considerably in the past few months and that there are indications the downward trend in inflation would be sustained ".

However, the Bank also cautions that being too hasty in easing interest rates could be "destabilising". The Bank reiterated this view at the Monetary Policy Forum last night, reducing hopes that an early rate cut would be on the cards.

In the review, the Bank said the positive outlook for inflation was influenced by the weaker global economic environment and domestic factors, such as lower producer and consumer inflation numbers and the rand's continued strength all of which should help to steer inflation towards its target this year.

The Bank has forecast that its targeted inflation rate, CPIX (consumer inflation excluding mortgage costs), should reach 5,7% by the last quarter this year, slightly below the upper limit of the 3%-6% target.

It is likely that inflation may slow even more sharply than projected by the Bank. These forecasts are based on data from the final quarter last year and used in last month's monetary policy committee meeting, where it a decision was made to keep interest rates unchanged.

But since then the rand has continued its rapid appreciation against the dollar gaining 13% against the US currency this year alone and strengthened considerably against other major currencies.

Also, international oil prices have fallen sharply, which bodes well for the outlook in inflation.

The CPIX has slowed for four months in a row from a peak of 12,7% in November, but has raised concern that consumer inflation was not decelerating as fast as producer inflation.

Last month CPIX slowed to a worse than expected 11,3%, while producer price inflation hit 5,1% last month, its lowest level in almost four years.

The committee is scheduled to meet in June to decide whether or not to cut interest rates. Most economists expect the Bank to ease rates by 100 basis points at the June meeting, but recently some have argued that a rate cut may be delayed until September.

But the relatively positive outlook for inflation outlined in the review should raise hopes once again of a rate cut sooner than later.

In addition to the slowdown in inflation numbers, consumer demand and money supply have also started decelerating since the final quarter of last year.

Demand for durable goods slowed considerably as the four interest rates hikes last year dampened consumer spending.

This also slowed down manufacturing activity, which was also hit by lower export growth as a result of the stronger rand.

Inflationary pressure from the domestic economy has started abating as a result, something that bodes well for inflation reaching its target later this year.

The threat to inflation from high international oil prices has also "receded", according to the review.

World oil prices had a turbulent time last year in the run-up to the war in Iraq. Threats of disruption to oil production in Iraq and a crippling strike by oil workers in Venezuela sent Brent crude oil prices from $19 a barrel in January last year to a peak of almost $35 a barrel last month. Oil prices fell sharply in the first week of the war in Iraq, and have since been trading at about $25.

Lower inflation and a better inflation outlook indicates the Bank's tighter monetary policy stance is working, the review says.

"There is no doubt that the tightening of monetary conditions has contributed to the improved outlook for inflation. The (committee) came under considerable criticism in the course of 2002 for the measures taken to combat the surge in inflation. It would appear, however, that the monetary policy actions taken in 2002 have prevented an uncontrolled inflation spiral," the review notes.

The biggest risks to the inflation outlook, the Bank said, were "stubbornly high" inflation expectations, and their effect on pay settlements, as well as high administered prices charged by government agencies.

The University of Stellenbosch's Bureau of Economic Research, which measures inflation expectations on a quarterly basis, showed that all three sectors finance, business and labour raised their inflation expectations for this year.

Those surveyed in the first quarter this year predicted CPIX would reach an average of 9,2% this year up from 8,6% when surveyed in the previous quarter. But over the longer term, inflation expectations have abated.

Labour costs also remain a threat to the inflation picture, with unit labour costs on an upward trend since last year.

The Bank says nominal unit labour costs increased 8,4% between the second half of 2001 and the same period last year. This was higher than the upper limit of the inflation target. Inflationary pressure from administered prices has also continued to be a problem for the inflationary outlook because of its almost 25% weighting in the CPIX basket.

The average increase in administered prices last year was 8,4%, with the prices of medical, education services and water rates rising 10% or more in the same period.

Some economists have argued that domestic inflationary pressure from wages and administered prices remain too strong still, which would persuade the Bank to hold interest rates steady in June.

At 11,3%, last month's CPIX was almost double the 6% upper limit, which has made some economists doubt if interest rates would be cut in June.

The Bank forecast of CPIX reaching 5,7% by this year's final quarter is based on the assumption that interest rates remain at current levels.

With very low interest rates in developed country markets, high domestic interest rates have attracted foreign investors looking for returns from high-yielding money market assets.

Some analysts have cautioned that a cut in interest rates would see a reversal of these speculative capital inflows, something that could see the rand retreat sharply from the two-year peaks at which it was currently trading.

<a href=www.agweb.com>AgWeb.com 4/23/2003 by Julianne Johnston

According to the latest World Trade Organization (WTO) figures, merchandise trade grew by 2.5% in 2002, up from a 1% decline in 2001. WTO says the increase is driven by strong demand in the United States and the big Asian economies.

But trade growth, which was significantly above the 1.5% increase in total world output, was uneven and masked the sluggish trade performance in many regions including Latin America and Western Europe, adds the group.

WTO says considerable uncertainty clouds trade growth prospects for 2003. Early indications suggest that at less than 3%, growth in trade volume for 2003 will be little or no better than 2002. This is well below half the average rate of trade growth achieved in the 1990s (6.7%). The downside risks on predictions for 2003 are large, bearing in mind continued sluggishness in the world economy, the conflict in Iraq, and the possibility of the continuing spread of the Severe Acute Respiratory Syndrome (SARS).

“These trade figures reflect the growing economic and political uncertainty in the world today. This uncertainty is detrimental to economic growth and development and can give rise to greater instability across the globe. Governments must send a signal that they are prepared to address this problem. One very important contribution to this effort would be to accelerate work on the negotiations in the Doha Development Agenda,” said Director-General Supachai Panitchpakdi.

The WTO says trade recovery occurred amidst the weakness of the global economy, greatly reduced investment flows, major movements in exchange rates, dented business confidence, increased restrictions on international trade transactions to reduce risks from terrorism and rising geopolitical tensions.

Some details of developments in specific countries or groups of countries:

• Developing Asia’s merchandise trade grew by about 12.5% in volume terms, driving the entire continent’s exports and imports to grow by double digits. The region also saw diverging growth paths between Japan, still Asia’s largest economy, and China and India, the two most populous nations in the world. In value terms, China’s merchandise exports and imports increased by more than 20% while India’s also grew at double-digit rates. China has overtaken the UK to become the fifth largest trader in the world. Japan’s merchandise export growth was only 3% while imports contracted.

• Transition economies’ trade continued to show strong growth with merchandise trade expanding by about 10% lifted by strong domestic demand growth and by rising foreign direct investment (FDI) inflows into the region.

• Imports into the US grew by 3% driven by continuing consumer spending and an increasingly expansionary fiscal stance. But exports declined by nearly 4% partly reflecting reduced demand from some key trading partners whose economies were either hardly growing, such as Western Europe and Japan, or in outright contraction, as in Latin America. Lack of price competitiveness might have also played a major role as US exports decreased even to those regions whose imports grew strongly.

• Western Europe’s trade stagnated in volume terms with merchandise exports increasing by just 0.6% and imports declining by 0.5%.

• Latin America saw one of its worst years with the crises in Argentina, Venezuela and difficulties in Brazil in the run-up to the national elections. Latin America’s merchandise imports declined by over 5% in 2002 although merchandise exports rose by about 2% with the decline in intra-regional trade (especially intra-MERCOSUR trade) being balanced by increased shipment to other regions.

• LDC exports and imports rose last year although it does not change their overall situation as marginal participants in world trade.

• Oil exporting LDCs saw a strong increase in the dollar value of their shipments as they increased their production and volume of trade. Exports of the non-fuel commodity exporting countries continued to rise after marked gains in 2001. However, exporters of manufactured goods experienced stagnation.

Link to full WTO report www.wto.org

<a href=reuters.com>Reuters Wed April 23, 2003 07:39 AM ET By Robert Evans

GENEVA (Reuters) - International trade in goods looks at best to be heading for only minimal growth this year, the World Trade Organisation said on Wednesday.

Even this could be thrown into doubt by fallout from the Iraq war, the SARS virus and overall world economic gloom, the organisation said in its annual spring report.

Rapid trade expansion over decades has been a motor creating jobs and wealth in the global economy, but the report says initial signs suggest goods volume will increase by less than three percent this year after a poor 2.5 percent expansion last year and a shrinkage in 2001.

"Considerable uncertainty clouds trade growth prospects for 2003," it said. "The downside risks on predictions for 2003 are large." Even the expected rise would rest on more production and consumer demand from now on, which WTO Director-General Supachai Panitchpakdi described as far from assured.

The 2002 total trade value of $6.24 billion marked a turnaround from a 2001 trade decline of one percent, the first year of shrinkage in some 20 years after record growth of 12 percent in 2000. Strong demand in the United States and larger Asian economies drove last year's upturn, but Europe and Latin American performances were sluggish. GROWING UNCERTAINTY

Director-General Supachai, former deputy prime minister of Thailand, said the figures reflected growing world economic and political uncertainty, which could give rise to instability.

To counter this, he suggested governments accelerate efforts to complete trade liberalization talks launched in Doha, Qatar, in November 2001 and due to establish a new world trade treaty by January 1, 2005. International trade rules are based on multilateral negotiations involving all 146 member states.

The World Bank has said the Doha Round negotiations, if successful, could inject a huge boost into the world economy, but negotiators have missed important deadlines and many trade analysts say the talks are likely to drag on well into the second half of the decade.

The WTO report, written before the U.S.- British invasion of Iraq, suggested the decision by the two powers to go it alone could have serious repercussions on trade politics and so endanger global governance through bodies like the WTO.

And erosion of confidence in global institutions might encourage closed groupings, or blocs, of trading states and inward-looking policies such as protectionism.

Last week Rubens Ricupero, Supachai's counterpart head of the U.N.'s trade and development agency UNCTAD, said trade regionalism was potentially even more dangerous than protectionism especially for poorer countries. And many trade analysts fear a trend to regional trade pacts could become a landslide. CHINA, INDIA DOING WELL

In its detailed figures for 2002, the WTO report said goods trade by Asian developing countries expanded about 12.5 percent, with China hitting 20 percent growth and India 15 percent. Japan's growth was only three percent.

China joined the WTO at the end of 2001 and overtook Britain last year to become the world's fifth largest single trader behind the United States, Germany, Japan and France. Britain was sixth and Canada seventh.

U.S. exports shrank nearly four percent but imports surged three percent, driven by consumer spending and tax cuts. Western Europe -- the 15-nation European Union and its four-nation EFTA partners including Switzerland -- saw goods imports fall 0.5 percent and exports rise 0.6 percent.

Argentina's economic crisis, political instability in Venezuela and uncertainty in Brazil ahead of elections together badly affected Latin America, where imports dropped five percent as exports rose two percent.

But there was a brighter picture in the trade of commercial services. The WTO report said the 2002 value of services exchanges covering areas like banking, telecommunications, travel and tourism rose five percent to $1.54 billion.

Forbes.com-Reuters, 04.23.03, 6:02 AM ET By Robert Evans

GENEVA, April 23 (Reuters) - World goods trade, whose steady expansion over decades has been a motor of the global economy, looks headed at best for only minimal growth this year, the World Trade Organisation (WTO) said on Wednesday.

Even this could be thrown into doubt by fallout from the U.S.-led invasion of Iraq, the spread of the deadly SARS epidemic, and overall world economic gloom, according to the body's annual spring report.

"Considerable uncertainty clouds trade growth prospects for 2003," said the report. Initial signs suggested world trade volume would increase by less than three percent after an already poor 2.5 pct rise last year.

But even this would depend on a pickup in global production and consumer demand from April onwards -- a development that WTO Director-General Supachai Panitchpakdi suggested was far from certain in the present world political and economic climate.

"The downside risks on predictions for 2003 are large," the report declared.

The figures for 2002 marked a slight turnround from the disaster year of 2001 when trade declined, by one percent, for the first time in some 20 years -- after a record growth of 12 percent in the boom year of 2000.

The report said last year's upturn -- to a total value of $6.24 billion -- had been driven by strong demand in the United States and the bigger Asian economies, but was held back by a sluggish performance in Europe and Latin America.

GROWING UNCERTAINTY

Supachai, a former deputy prime minister and economy minister of Thailand, said the figures reflected "growing economic and political uncertainty in the world today" which could give rise to even greater global instability.

One way to tackle this, he suggested, would be for governments to speed up efforts to complete the deeply troubled Doha Round of liberalisation talks launched in November 2001 and due to end with a new world trade treaty by January 1, 2005.

The negotiations -- which the World Bank says could give a huge boost to the world economy if successful -- have already missed some important deadlines and many analysts say they are likely to drag on well into the second half of the decade.

The WTO report, written before the controversial U.S.- British invasion of Iraq last month which toppled President Saddam Hussein, suggested that the decision by the two powers to go it alone could have serious repercussions on trade politics.

It said the intervention -- launched without the approval of the United Nations and in the face of opposition from major powers like Germany, France and Russia -- could endanger the system of global governance through bodies like the WTO.

"The erosion of confidence in global institutions could encourage the creation of like-minded blocs" -- diplomatic phrasing for closed groupings of trading states -- "and inward- looking policies" -- or protectionism -- said the report.

International trade rules are currently set in multilateral negotiations involving all WTO member-countries, presently totalling 146. But many trade analysts fear the current trend to regional trade pacts could become a landslide.

Last week Rubens Ricupero, Supachai's counterpart at the head of the U.N.'s trade and development agency UNCTAD, said trade regionalism was potentially even more dangerous, especially for poorer countries, than protectionism.

CHINA, INDIA DOING WELL

For 2002, the WTO report said, goods trade by developing countries in Asia -- excluding Japan -- grew by about 12.5 percent, with China hitting 20 percent growth and India up 15 percent. Japan's growth was only three percent.

China, which joined the WTO at the end of 2001, at the same time overtook Britain last year to become the world's fifth largest single trader behind the United States, Germany, Japan and France. Britain was sixth and Canada seventh.

U.S. exports declined by nearly four percent, but imports surged by three percent, driven by consumer spending and tax cuts. Western Europe -- the 15-nation European Union and its four-nation EFTA partners including Switzerland -- saw goods imports down by 0.5 percent and exports up by 0.6 percent.

Latin America was badly affected by the crisis in Argentina, political instability in Venezuela and uncertainty in Brazil as it moved towards its autumn president election, the report said. The region's imports declined by five percent while exports rose by two percent.

There was a brighter picture for exchanges of commercial services, according to the WTO. The value of service trade -- covering area like banking, telecommunications, travel and tourism -- rose five percent to a total of $1.54 billion.

Forbes.com-Reuters, 04.22.03, 8:41 PM ET By Erwin Seba

HOUSTON, April 22 (Reuters) - Two of the world's largest oilfield services companies on Tuesday said strong North American drilling activity helped offset lower international demand caused by political turmoil in oil-rich Nigeria and Venezuela. Baker Hughes Inc (nyse: BHI - news - people), the No. 3 oilfield services company, reported first-quarter earnings that rose 33 percent on the strength of North American drilling activity spurred by big natural gas demand. Schlumberger Ltd (nyse: SLB - news - people), the largest oilfield services company in the world, said North American activity was strong, but not enough to offset lower international revenues and weaker demand at its seismic and information technology units. The company's first quarter earnings fell 14 percent over the first quarter of 2002. Schlumberger, headquartered in Paris and New York, reported net income of $149 million, or 26 cents per share, compared with $172.5 million, or 30 cents per share, a year ago. Analysts had projected earnings per share in a range of 29 cents to 19 cents, with a mean of 24 cents, according to Thomson First Call. Schlumberger said operating revenue rose 2.5 percent to $3.34 billion in the quarter, compared with $3.26 billion in the year-ago period. Houston-based Baker Hughes said net income in the first quarter increased to $44.5 million or 13 cents a share, from $33.3 million or 10 cents a share, in the same period a year ago. Baker Hughes said it expects to meet Wall Street's earnings expectations for the second quarter and full year. "Investors have been waiting for companies like Baker Hughes to voice their optimism," said analyst James Wicklund of Banc of America Securities. "They don't seem to be irrationally exuberant." Baker Hughes on April 11 cut its first-quarter earnings guidance down to the 13-cent range from nearly 20 cents, blaming disruptions in the lucrative drilling markets in Nigeria and Venezuela. On generally accepted accounting principles (GAAP) basis, Baker Hughes' first-quarter profit was $47.4 million or 14 cents a share, compared to $70.6 million or 21 cents per share. Analysts on average expected the company to post earnings of 14 cents a share, according to research firm Thomson First Call. Schlumberger, however, was more cautious in its outlook, saying only that rising demand for oilfield services in North America is likely to continue. Activity levels outside North America "will remain uncertain until the global economic environment improves the outlook for energy demand," the company said in a statement.