Monday, April 28, 2003
Equities retreated at week's end on disappointing economic data and continued bad health news. Once again exogenous events are providing a distraction (and an excuse) to look elsewhere rather than at fundamentals. Iraqi worries are being supplanted by SARS, which is spreading throughout the world and especially in Asia. Hong Kong had been looking forward to a robust recovery just a few weeks ago, now they are worried about a recession. And continued ominous rumblings from North Korea about their nuclear capabilities are rattling investors, especially in South Korea and Japan. And Iraq shouldn't be pushed to the back burner just yet, given the leadership vacuum on virtually all levels. On the week, only three indexes increased - All Ordinaries up 1.5 percent, NASDAQ up 0.6 percent, and Bolsa up 0.4 percent. The Bolsa and NASDAQ remain above their 2002-yearend levels. The remaining 10 indexes followed here were down anywhere from 0.1 percent (S&P/TSX Composite) to 9.3 percent (Kospi). As recently as Wednesday, many indexes looked poised to leap over their 2002-yearend levels, but profit taking and growth worries have made them back off.
OECD reviews world outlook
The Organization for Economic Cooperation and Development (OECD) cut its forecast for 2003 global economic growth to 1.9 percent from 2.2 percent predicted in November. There's no sharp post-Iraq rebound expected. Growth for 2004 is anticipated to be about 3 percent. As usual, the U.S. is expected to pace the recovery with the EMU and Japan lagging. The OECD, repeating oft-heard advice, said that Japan and Europe - especially Germany - must carry out basic economic reforms to keep from falling further behind. The growth gap between Europe/Japan and the U.S. has been widening for more than a decade. The OECD named SARS among the risks to global growth, especially if the emergency were to worsen.
The main revision to the OECD growth forecasts concern the EMU, where the economy is expected to expand by a mere 1 percent this year (rather than the 1.8 percent rate predicted earlier). Rising unemployment is expected to dampen consumer spending. In Europe, national scope to stimulate growth through traditional fiscal policy moves - lowering taxes and increasing spending - is limited. Governments are constrained by the Growth and Stability Pact's requirement to keep deficits below 3 percent of gross domestic product or face fines. Germany and France are expected to violate the requirement in the three years to 2004 unless they cut spending or raise taxes.
Japan's economy is expected to grow by 1 percent in 2003 and 1.1 percent in 2004. The organization pointed once again to the need for decisive restructuring of the financial sector. It also said that the Bank of Japan hasn't done enough to contain deflation by increasing money supply.
Exogenous events
