60926 Daily Brief Economics and Financial Market Commentary January 25, 2008 11:21 am Mick Riordan (x31289), Cristina Savescu (x80812), Eung Ju Kim (x85804), Shane Streifel (x33867), Annette De Kleine (x34710) You’ll find recent issues of this Daily and lots of other current analysis and high-frequency data at our intranet website: http://GEM or for external users: www.worldbank.org/gem Global stock markets continue in recovery. European and Asian stock markets continued to rebound on Friday, further recovering from their earlier losses this week, as overnight gains in U.S equities following news of the government stimulus package, and positive U.S. labor market data shored up investor confidence. Investors were also buoyed by expectations of a further interest rate cut by the Federal Reserve. European stocks rose, led by carmakers, technology companies, and commodity producers, following a strong close on Wall Street and continuing rally in Asian markets overnight. The Dow Jones Stoxx-600 index gained 1.6% to 327 at midday, cutting this week’s losses to 0.1%. London’s FTSE-100 index gained 1%; France’s CAC-40 index climbed 1.3% and Germany’s DAX index added 2%. National benchmarks gained in all of 18 western European markets [see Daily chart at http://GEM]. Asian shares increased for a third day on Friday, sending the region’s benchmark index to its largest gains in a decade after the U.S. government’s stimulus proposal lifted shares on Wall Street. The MSCI Asia-Pacific Index gained 4.5% to 145.73 led by bank shares including Mizuho Financial Group, National Australia Bank and HSBC Holdings. The region’s increase was led by Hong Kong with the Hang Seng rising 6.7% to 1,583, the biggest movement among global benchmark indexes. Japan’s Nikkei-225 index climbed 4.1% to 13,629, posting its biggest gain since March 2002. South Korea’s KOSPI index closed up 1.8% at 1,692, rising for a third day, after news of stronger-than-expected economic growth in the fourth quarter. And Philippine share prices also gained 2.9% after Moody’s Investor Service raised the outlook on the country’ credit rating from stable to positive. All other benchmarks in the region advanced as well. European business and consumer sentiment at apparent odds. Views concerning the sharp falloff in European equities, a pick-up in inflation in the Euro Area to six-year highs, sluggish consumer spending and headwinds facing exports are increasingly diverging between business and consumers. Today’s readings of INSEE January business confidence in France for example, shows no change from December levels at an index value of 109. Business manager’s perceptions of output gains fell from a reading of +4 in November to -4; but projections for their own business operations climbed from a reading of 12 to 19 in the month. This follows two reports yesterday highlighting a pickup in business sentiment in Germany, and the small bell-weather Belgium. These developments suggest that European business anticipates avoiding the worst of the fallout from a U.S. downturn, while viewing the Area’s underlying fundamentals as still sound. In contrast, consumer sentiment is dropping fairly sharply across the Euro Zone. Today’s report on the Netherlands showed confidence falling to a 20-month low, on concerns that economic growth is slowing. “This is a mild decline�, notes Charles Kalshoven of ING Postbank in Amsterdam, “I expect consumer confidence to fall much further.� Meanwhile, Italian consumer confidence declined to two-year lows in January according to the Rome-based Isae Institute. Italian consumers are being hit by rising inflationary pressures, which reached a four-year high 2.6% in 2007, and by slowing economic growth, which the Bank of Italy projects will decline to 1% during 2008 from an expected 1.7% in 2007. Japan’s inflation surges to 9-year high in December. Like many high-income and developing countries, Japan is now experiencing a sharp upturn in inflation on the back of higher energy prices and rising costs for foodstuffs and food products. After many years of pressures at the factory input level, companies are increasingly apt to pass-through costs to consumers in an effort to firm-up bottom lines. CPI climbed to 0.8% in December (y/y) double the 0.4% pace of November inflation, both quite high by Japanese norms of modestly declining prices. Oil prices neared $100/bbl levels in December. Dairy farmers in Hokkaido yesterday raised the price of milk by 3% due to higher costs of feed for cows; Kirin Breweries plans to boost beer prices in the next months due to higher malt and barley costs, while Nissin foods will increase prices of noodle and pasta products to account for the soaring cost of wheat. “The global economy is slowing while prices of food and energy keep advancing,� notes Hiroshi Shiraishi of Lehman Brothers, Tokyo. “That’s the worst combination for the Japanese economy, which depends on exports and has stagnating domestic demand�. Among emerging markets...in East Asia, Thailand’s central bank expects the economy to expand between 4.5% and 6% in 2008, even if the U.S. enters a recession, as higher government spending will contribute to growth. Slower global demand is expected to bring export growth down to between 9% and 12% in 2008, from 17.5% in 2007. The central bank revised up its headline inflation forecast to between 2.8% and 4%. South Korea’s economy gained 1.5% in the fourth quarter of 2007 (q/q, saar), pulled up by the most pronounced increase in exports in four years (7.3%) and stronger business investment, up 4.4%. Annual growth in the fourth quarter accelerated to 5.5%, the quickest pace in almost two years. China’s foreign direct investment increased 6.2% in 2007 to $18.7 billion, with mergers and acquisitions accounting for 32.6% of total investment. Meanwhile wholesale crude oil prices in China surged 35% in December (y/y) while oil-product prices were up 8%. Coal prices increased 14%, while electricity prices were up 2.1%. In Latin America, Mexico’s economy expanded more-than 3% in 2007 according to Deputy Finance Minister Dionisio Perez-Jacome, and is expected to expand by 3.7% this year, notwithstanding the slowdown in the U.S. economy. Meanwhile retail sales grew 3.4% in November (y/y) down from 4.1% in the previous month, signaling a movement toward weaker domestic consumption. ***************************************************** The Daily Brief is a summary of economic news items for Bank staff whose responsibilities require that they stay abreast of changes in global markets. The views expressed here are those of the various authors and do not necessarily reflect those of the World Bank Group's Executive Directors or the countries they represent. The content is subject to copyright and is not for quotation outside of the World Bank. The Prospects Group of the World Bank is pleased to share this content with GEM subscribers, under the terms and conditions of use agreed upon login (at www.worldbank.org/gem) to the extranet GEM site. Feedback and requests to be added to or dropped from the distribution list, may be sent to eriordan@worldbank.org.