Financial thoughts

The Philippines cut its 2008 economic-growth forecast for the second time this year as faster inflation hurt consumption, adding pressure on the government to boost spending on food and fuel subsidies to the poor.

Gross domestic product may expand 5.5 percent to 6.4 percent this year, from an earlier forecast of as much as 6.6 percent, Economic Planning Undersecretary Augusto Santos said in a telephone interview from Manila today.

Philippine stocks and the peso fell on concern the government may expand subsidies for the third of the 96 million population that lives on less than a $1 a day, widening its deficit. A 62 percent jump in oil prices in the past year has fueled Asian inflation that may reach a decade high this year, deepening an economic slowdown brought on by falling U.S. demand.

“The government will have to do more pump-priming,” said Joric Nazario, treasurer at Philippine Veterans Bank in Manila. “More expenses may mean bigger deficits down the road. It becomes less attractive to hold peso assets.”

President Gloria Arroyo in May pledged to boost investment and lift spending on rice and other subsidies to help Filipinos cope with soaring prices, abandoning her plan to balance the budget this year. Finance Secretary Gary Teves has said the government may post a 2008 deficit of 40 billion pesos to 75 billion pesos.

Intel Chips

The $118 billion economy expanded 5.2 percent in the first three months of 2008, the slowest pace in six quarters. Inflation in the Philippines accelerated to 12.2 percent last month, the fastest pace in more than 16 years, crimping consumer spending that makes up 70 percent of the economy.

Global growth has slowed as the U.S. housing recession hurts demand for made-in-Asia Intel Corp. computer chips and other goods, while record commodity prices leave consumers with less to spend around the world.

Japan’s economy, the world’s second biggest, contracted last quarter as exports fell and consumers spent less, bringing the country to the brink of its first recession in six years payday advances. Europe’s economy last quarter shrank for the first time since the introduction of the euro almost a decade ago.

“It’s mainly because of the economic slowdown brought about by high oil prices,” Santos said of the Philippines’ new growth forecast. Crude oil reached a record $147.27 a barrel on July 11.

The Philippines imports almost all of its oil. Local pump prices have risen 42 percent this month from a year ago, according to Department of Energy data.

Peso, Stocks

The peso declined 0.5 percent to 45.73 against the dollar at 10:59 a.m. in Manila, according to Tullett Prebon Plc. It had gained as much as 0.08 percent before Santos’s comment. The Philippine benchmark stock index fell to a two-week low.

Shares of Bank of the Philippine Islands, the nation’s biggest lender by market value, fell the most in almost three weeks in Manila trading on speculation slower-than-expected economic growth will cool demand for loans.

Jollibee Foods Corp., the Philippines’ largest fast-food company, last week posted its third straight quarterly profit decline as higher meat and rice prices eroded sales. Globe Telecom Inc., the nation’s second-largest mobile-phone company, this month said profit fell 27 percent in the second quarter as Filipinos cut back on calls and text messages.

The government first cut its growth target in May to 5.7 percent to 6.6 percent this year, from 6.3 percent to 7 percent previously. It will release second-quarter economic data next week.

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The Bank of Japan said it became more pessimistic about the outlook for the economy and kept interest rates at the lowest level among industrial nations.

“Economic growth has been sluggish against the backdrop of high energy and materials prices and weaker growth in exports,” Governor Masaaki Shirakawa and his six colleagues said in a statement today after leaving the key rate at 0.5 percent.

The world’s second-largest economy shrank at an annual 2.4 percent pace in the second quarter, as decade-high inflation deterred spending and a global slowdown dented exports. In April, the central bank shelved a policy of raising rates, and with Japan on the verge of a recession, economists say borrowing costs are unlikely to increase until next year at the earliest.

“Now the focus is on how long the downturn will last,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The economy isn’t likely to recover until 2010, and rates won’t rise before then.”

Financial-market instability, the U.S. and global slowdown, and rising commodity prices all pose risks to Japan’s economy, the central bank said in the statement. The bank cut its assessment for the second straight month, after saying in July that the economy was “slowing further.”

`Moderate Growth Path’

“While growth will likely remain sluggish for the time being, it is expected to return gradually onto a moderate growth path” as commodity prices ease and the global economy recovers, the bank said.

The yen traded at 109.74 per dollar compared with 109.80 before the announcement. The yield on Japan’s 10-year bond rose half a basis point to 1.445 percent. The rate decision was unanimous, and expected by all 32 economists surveyed.

Analysts don’t anticipate the bank will reduce borrowing costs because Shirakawa is wary that keeping them low could stimulate the economy too much once it recovers.

“If the downside risks to the economy turn out to decrease, there will be an increased risk that prolonging the period of accommodative financial conditions will lead to swings in economic activity and prices,” the bank said.

Of 26 economists who gave predictions through June, 21 said there will be no move by then. Four estimated higher rates and one forecast a cut.

Resume Rate Increases

“The Bank of Japan will resume seeking normalization of interest rates once the economy shows signs of a recovery,” said Teizo Taya, a former central bank policy maker and now adviser to the Daiwa Research Institute in Tokyo. “Still, it’s hard to anticipate a hike this year or even early next year.”

Exports dropped the most since the 2001-2002 recession, last week’s gross domestic product report showed, robbing Japan of the engine that drove its longest postwar expansion. The government earlier this month described the economy as “weakening,” language it hadn’t used since 2001, after reports showed shipments abroad, factory production and household spending all fell in June and the unemployment rate increased.

The central bank last month cut its growth forecast for the year ending March to 1.2 percent from 1.5 percent, saying higher commodity prices are hurting the expansion. Policy makers may have to lower the estimate again when they publish their next outlook in October, said Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo.

Growth Outlook

“It’s already become difficult for the economy to expand as much as the central bank forecast last month,” said Kanno, who used to work at the Bank of Japan.

Rising energy and raw-material costs are squeezing businesses and consumers in a country that imports almost all of its oil and 60 percent of its food.

Consumer prices excluding fresh food climbed 1.9 percent in June from a year earlier, the fastest pace in a decade. Prices businesses pay for fuel and materials surged 7.1 percent in July, the most since the wake of the second oil crisis 27 years ago.

The central bank said consumer prices are “expected to be somewhat higher over the coming months but to moderate gradually thereafter.”

So far there’s little evidence that Japan’s inflation is spreading from imported fuel and foods. Excluding food and energy, consumer prices rose 0.1 percent in June. The equivalent gauge in the U.S. climbed 2.5 percent last month.

“Even though Japan’s inflation is surging, it remains considerably low compared with other countries’,” said Ryutaro Kono, chief economist at BNP Paribas in Tokyo. “A rate increase is just not an option.”

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British Airways PLC, American Airlines and Spain’s Iberia SA said Thursday they have signed a joint business agreement on flights between North America and Europe.

The three airlines said that they planned to file for worldwide antitrust immunity from U.S. authorities for the deal later Thursday. They will also notify European regulatory authorities.

A deal between the trio has long been anticipated — rival carrier Virgin Atlantic earlier this week sent a pre-emptive letter to both U.S. presidential candidates warning that a deal would be anticompetitive on the lucrative trans-Atlantic route.

British Airways (BAIR.Y), AMR Corp (AMR, Fortune 500).’s American and Iberia argued that a closer relationship on pricing and seat capacity will benefit customers by providing improved connections and flight schedules.

Legally separate, with pooled flights

Under the joint business agreement, the three airlines will cooperate commercially on flights between the United States, Mexico and Canada, and the European Union, Switzerland and Norway while continuing to operate as separate legal entities.

They will expand their codeshare arrangements on flights within and beyond the EU and United States, significantly increasing the number of destination choices that the airlines can offer customers.

"We believe our proposed cooperation is an important step towards ensuring that we can compete effectively with rival alliances and manage through the challenges of record fuel prices and growing economic concerns," said AMR Corp. chairman and chief executive Gerard Arpey. "In addition, we believe we will be more effective competitors with greater ability to invest in our products and services."

BA and American want rules exemption

Strict airline ownership laws in the United States all but rule out a full combination between BA and American Airlines easy payday loans. However, an exemption from anti-competition laws could allow the pair to run their trans-Atlantic operations as a single company, with cooperation on pricing and schedules — adding to the flight capacity and airline facilities they already share in the "oneworld" alliance.

BA and American have failed in the past to win an exemption from U.S. competition laws to work more closely together because of their dominance at London’s Heathrow Airport, where the pair have more than half the capacity to and from the United States.

However, they are expected to argue that the competitive situation has changed since the "open skies" agreement between the United States and the European Union came into force in March, allowing airlines to fly to and from any point in the United States and any point in the EU.

Virgin Atlantic Airways head opposes deal

Virgin Atlantic Airways president Richard Branson said earlier this week that he had written to Senators Barack Obama and John McCain to warn that the proposed alliance between British Airways PLC and American Airlines would severely damage competition on trans-Atlantic routes.

Branson said that a closer relationship between the two carriers would result in higher prices for customers and job losses on both sides of the Atlantic, adding it was "very dangerous" to believe that consolidation was the best response to the current difficult economic conditions.

"Just because life is tough out there, you shouldn’t rid yourself of competition," Branson told BBC radio. 

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Thomson Reuters said second-quarter earnings fell 54% as costs to buy and integrate Reuters cut into profit.

The provider of financial news and professional information said net income fell to $173 million from $377 million a year ago. After paying preferred dividends, per-share income fell to 22 cents from 58 cents.

Revenue rose 73% to $3.13 billion, mostly because the result included nearly a full quarter of revenue from Reuters.

Thomson Corp. bought Reuters Group PLC for about $15.8 billion on April 17, making this the first quarter the combined company has reported results.

"We are encouraged by the robust revenue growth which we achieved despite the backdrop of a challenging economic environment," Chief Executive Thomas Glocer said in a statement.

He said the financial services markets are "likely to remain challenging," but the company reiterated its full-year target for revenue growth of 6% to 8%.

Assuming the two companies had been combined a year ago, operating profit from continuing businesses in the second quarter was flat at $405 million and revenue rose 11% to $3.44 billion.

The company’s professional division, which includes information services to the legal, tax and health care professions, had 10% higher revenue and 10% higher operating profit.

The markets division, which combines the businesses of Reuters and the Thomson Financial group, had 12% higher revenue of $2.1 billion. Operating profit jumped 30% as the company cut costs by combining certain business functions.

Glocer said the integration of Reuters with Thomson was ahead of plan, and will be complete within one year of the acquisition. He said the company already cut costs by $490 million and would hit $1 billion in savings by 2010.

Thomson Reuters (TRI) shares fell 13 cents to $34.41 in midday trading. 

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China's inflation cooled to the slowest pace in 10 months, giving the government more room to restrain the yuan's advance and bolster economic growth.

Consumer prices rose 6.3 percent in July from a year earlier as food costs eased, the statistics bureau said today, after a 7.1 percent gain in June. That was below the 6.5 percent median estimate of 17 economists surveyed by Bloomberg News.

The slowdown may encourage government policies aimed at sustaining growth in the world's fourth-biggest economy rather than fighting inflation. While policy makers have halted the yuan's appreciation and boosted tax rebates to help exporters, data yesterday showing the fastest producer-price inflation in 12 years underscores the risk that consumer prices will rebound.

“The headline number looks good but price pressures in the pipeline mean it's not all good news,'' said Kevin Lai, an economist at Daiwa Institute of Research in Hong Kong. “Round one is probably over, but it is still too early to claim a gold medal over inflation fighting.''

The yuan weakened 0.1 percent to 6.8626 against the dollar as of 2:56 p.m. in Shanghai. The CSI 300 Index fell 0.6 percent after sliding 5.2 percent yesterday on concern that producer- price gains will erode profits and prompt monetary tightening.

Global Inflation

Inflation is accelerating in the U.K., the U.S., European Union, Japan, Australia, India, Korea and Canada. Singapore's consumer prices are rising at the fastest rate in 26 years and India's inflation has quickened to the fastest pace in more than 13 years.

China's meat prices rose 16 percent in July, the smallest increase in more than a year, reflecting improved pork supplies and a big jump a year earlier. Non-food prices climbed 2.1 percent, the largest gain since Bloomberg data began in 2005.

China may boost spending on infrastructure and provide more export-tax rebates if economic growth keeps slowing, said T. J. Bond, chief Asia-Pacific economist with Merrill Lynch & Co. in Hong Kong. Gross domestic product rose 10.1 percent in the three months through June, the fourth quarter of slower growth.

“The Chinese inflation cycle has peaked,'' said Glenn Maguire, chief Asia-Pacific economist at Societe Generale in Hong Kong guaranteed cash advance loan. “We're going to see an extended period of sideways movement in the yuan.''

The yuan rose 4.2 percent in the three months through March and 2.3 percent in the second quarter before stalling in the third. The currency remains Asia's best performer against the dollar this year. Gains make exports more expensive and cut import costs.

`Fiscal Easing'

More export-tax rebates and a lowering of requirements for banks to set aside a record 17.5 percent of deposits as reserves are possible, Societe Generale's Maguire said.

“Fiscal easing is the next step,'' said Ben Simpfendorfer, an economist with Royal Bank of Scotland Plc in Hong Kong. “You may see increased payments to low-income households.''

Slower inflation also increases the likelihood of China again raising state-controlled energy prices, after increases in July and August that left them below global levels.

The People's Bank of China increased national commercial banks' lending quotas for 2008 by 5 percent last month to aid small and medium-sized businesses and farmers, according to a central bank official and a bond trader briefed by the central bank. Neither would be identified because they weren't authorized to comment.

Textiles, Garments

China raised tax rebates on exports of textiles and garments to 13 percent from 11 percent from Aug. 1 to aid manufacturers also facing rising labor and raw-material costs.

Exporters are concerned that a weakening global economy will erode shipments. Exports have climbed 22.6 percent this year, down from the 25.7 percent pace for all of 2007.

China's trade surplus unexpectedly widened in July to $25.3 billion from a year earlier, adding to inflows of cash from foreign direct investment and investors betting on more gains by the yuan. Excess money in the financial system threatens to stoke inflation.

February's 8.7 percent gain in consumer prices was the biggest in 12 years.

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