Global Economy-Businesses Gloomy, IMF Warns of Recession

March 27, 2003
By Caren Bohan

WASHINGTON, March 26 (Reuters) - Data highlighted a mood of caution at corporations in major economies as the IMF warned that the world could sink into recession if the war in Iraq drags on.

U.S. durable goods orders tumbled 1.2 percent in February, according to the Commerce Department. Weak demand for items such as computers, electronics and machinery weighed orders down, suggesting businesses remain wary of investing.

In Germany, the closely watched Ifo barometer of business confidence dipped unexpectedly to 88.1 from 88.9. The Ifo data, much of which reflected sentiment prior to the start of war, dashed hopes Germany's enfeebled economy was on the mend.

A report from a Japanese credit union showed that small firms in that country plan to cut capital spending by 32 percent in the fiscal year starting in April. That was worse than the 16.8 percent year-on-year fall expected this fiscal year, according to a Shoko Chukin survey of about 2,700 firms.

"It's clear that the world economy is not on a strong footing in the first quarter," said Lara Rhame, economist at Brown Brothers Harriman and Co. in New York.

German Chancellor Gerhard Schroeder told a news conference in Berlin that the downbeat Ifo report was not surprising.

"The situation is of course marked by the Iraq war, how else could it be?" Schroeder said.

EVEN A SHORT WAR WILL HURT GROWTH

Amid concerns about the war's effect on economic activity, International Monetary Fund Managing Director Horst Koehler said a lengthy war risked jeopardising global recovery.

"In the case of a long-lasting conflict a global recession can no longer be ruled out," Koehler was quoted as saying by German weekly German Wirtschaftswoch.

"It depends on how long the war lasts and what damage there is. But even a short war is an additional barrier to a recovery in the global economy. The uncertainty is prolonged. Many market participants will continue to hold back," he said.

U.S. forces fought bloody skirmishes in their advance towards Baghdad as severe sandstorms impeded their movements, underscoring the difficulties ahead in their effort to topple Iraqi leader Saddam Hussein.

Battlefield developments have also made financial markets take stock. A powerful equity market rally has stalled, the dollar held steady and oil prices have edged up -- although they remain below peaks hit before the tanks started to roll.

But confidence is also key and businesses and consumers are nervous.

In U.S. data that economists said may have been more a reflection of bad weather than of weak consumer confidence, the Commerce Department said sales of new U.S. homes fell 8.1 percent to a seasonally adjusted 854,000 unit annual rate, far lower than the rate expected by analysts.

There are also signs U.S. consumers, faced with mounting job losses, are struggling to keep up with debt payments.

The American Bankers Association said credit card delinquencies climbed to 4.07 percent of all accounts in the fourth quarter, up from 4 percent the previous three months.

CENTRAL BANKS ON HOLD

Two important pieces of economic data still to come this week -- the French business climate poll from INSEE on Thursday and the March University of Michigan sentiment survey on Friday -- will also include information gathered before the war.

This is making messages from the real economy much harder to fathom, so some central bank policymakers say the only option is to keep their powder dry on interest rate cuts.

"The international situation continues to be unclear. If that doesn't change, then we will analyse the situation in Rome but will not come to a (rate move) decision," European Central Bank council member Ernst Welteke told a news conference.

Welteke's remarks reinforced market expectations that ECB policymakers would keep interest rates on hold when they meet in Rome on April 3. It last moved on March 6 when it cut the bank's key rate to 2.5 percent.

U.S. Federal Reserve officials, who have said they are on "heightened surveillance" of the U.S. economy, have also given no indication they are ready to adjust rates right now.

Atlanta Federal Reserve President Jack Guynn said the U.S. economy has a large amount of liquidity with short-term interest-rates at four-decade lows of 1.25 percent. Guynn said the United States has been pursuing an "aggressively expansionary" monetary policy.

http://sg.biz.yahoo.com/030326/3/39fq3.html