By Anne D. Picker, International Economist, Econoday
Monday, August 11, 2003

Last Week's Highlights
Europe fries
The record-breaking heat wave that has been hitting Europe continues unabated, with rivers drying up, rail tracks buckling and forest fires blazing. Temperatures are breaking all heat records with those in Paris on a par with Mecca in Saudi Arabia. Portugal has been hardest hit by forest fires although the worst are under control. Farmers have been particularly hard hit from the combination of the extreme heat and drought. Rivers are low and ice cream sales have sky rocketed. Water levels on the Danube have dropped to such low levels that wrecks of the Nazi era are visible and a threat to disrupt traffic flows along the waterway.

Already in recession, Europe doesn't need weather complications. In Italy, the economy contracted in the first two quarters of 2003, putting it in a shallow recession. Now there is a chance of a power reduction because of low water levels, which would add another threat to the economy. Even the buffalo are under the stress from the heat and are producing less milk. There is less buffalo mozzarella as a result.

In France drought has cut in half normal fodder supplies, hurting farmers - and the heat is withering grapes, boding poorly for the wine industry. High temperatures, at times over 90 degrees Fahrenheit, have parched fields and orchards in France, Italy, Germany and Austria, causing losses in fruit, grain, sugar beets, canola, soy, sunflowers and crops grown for animal feed. A lack of rain is harming oak trees, and the truffle harvest is expected to suffer deep production cuts this year. (Some have resorted to watering the oaks in scant hopes of protecting the harvest.) In some regions, it's the second straight bad year, coming after floods last summer that drowned crops and waterlogged harvests in Germany and countries in eastern Europe.

Some economists expect the dry spell, which is crimping agricultural output, to lead to higher food prices. That could boost inflation roughly 0.2 percent in coming months. Europe has been fretting over budding price deflation in Germany, which has put pressure on the European Central Bank to ease credit to shore up demand. Now, higher price levels could make the ECB more reluctant to cut interest rates this fall, robbing businesses and consumers of lower borrowing costs.

Central bank notes
As expected, the Reserve Bank of Australia left its key interest rate at 4.75 percent. Both borrowing, especially for housing and autos, and consumer spending are surging. Rates have been stable since the bank raised them last in June 2002. The bank doesn't release a statement explaining its decision when it leaves rates unchanged. Its quarterly statement on the economy will be released on Monday. Bonds fell and the Australian dollar rose after the rate decision was announced. The Australian dollar has risen about 15 percent against the U.S. dollar this year, lowering the returns of exporters.

The Bank of Japan's monetary policy board also decided to leave policy unchanged. The bank has held short-term interest rates at zero for more than two years. The bank decided to leave its target for excess cash in the system in a range of ¥27 trillion ($227 billion) to ¥30 trillion ($252 billion). Stuck in a long economic slowdown, Japan has been hit with periodic fears about banking crises. But the Tokyo stock market - which plunged to 20-year lows earlier this year - has recently recovered somewhat, helping banks improve their books.

Investors can't make up their minds
Equity indexes followed here were mixed once again last week. Only four of 13 indexes were up on the week while nine were down. The FTSE was the best performer; the Kospi was the worst, followed closely by the Hang Seng, Nikkei and Topix. With earnings season just about over and economic data slow in coming, investors were left to their own vacillation whether the future will be positive or negative. The weather didn't help.

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