By Anne D. Picker, International Economist,Econoday
Monday, August 6, 2001

Weak economic data in the United States and abroad didn't keep major international indexes, with the exception of the Frankfurt DAX, from finishing on the plus side for the week. Though Japanese investors were hit by continued bad economic news, upper house elections gave Prime Minister Koizumi a vote of confidence. Now comes the hard part - persuading politicians and bureaucrats to go along with the prime minister's radical plans. In Europe, softer economic data was overcome by new exuberance for technology stocks, which was quickly subdued by continued poor earnings and weak employment news (see indicator scoreboard below). Most worrisome was the spread of weakness in manufacturing to the service sector in Europe and the United States. Until now, the service sector had rebuffed the slowdown and had been the only source of growth.

On Thursday, markets were caught off guard when the Bank of England's Monetary Policy Committee (MPC) surprised analysts and cut its policymaking interest rate by 25 basis points to 5 percent. This is the fourth cut this year and follows pressure from manufacturers who have been hit by the world economic slowdown and a strong currency. The Bank cited slowing world growth as a primary reason for the rate reduction. The Bank has an inflation target of 2.5 percent, and although prices have risen to 2.4 percent over the past two months, the increases have been attributed to erratic factors. Retail and housing have been quite strong but manufacturing is in desperate need of help after contracting for a fifth straight month. Analysts had not expected any rate change because inflation has risen in recent months and service industries remained buoyant. July retail sales rose at the fastest pace in 14 months and house prices rose for a fifth straight month. Consumer spending accounts for two-thirds of the economy.

However, the European Central Bank, as expected left their policymaking interest rate at 4.5 percent. Unlike the Bank of England, the ECB chose to ignore the growing string of weakening economic indicators and instead focused on inflation, which continues to run higher than their stability level of 2 percent. The ECB gave no reason for its decision. The ECB will take its traditional August vacation and will meet next on August 30.

Council members in recent weeks had followed ECB President Wim Duisenberg's cue in saying that interest rates continue to be appropriate in order to ensure medium term price stability. The ECB has said a rate reduction may threaten its aim of lowering the inflation rate below 2 percent next year. While the bank waits, the world economy is stalling. The ECB has lowered rates just once this year, compared to four reductions from the Bank of England and six cuts from the U.S. Federal Reserve.

Introduction   •   Global Stock Market Indexes   •   Recap of Global Markets   •   Currencies   •  Indicator Scoreboard

The Bottom Line   •   Looking Ahead