Baghdad bounce fails to materialise

LONDON - Evidence of a knee-jerk improvement in the world economy since the fall of Baghdad on April 9 remained sparse yesterday, suggesting most economies will need a further cut in interest rates to turn them around.


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Published: Sat 3 May 2003, 1:06 PM

Last updated: Wed 1 Apr 2015, 9:10 PM

Key surveys in the US and Europe this week showed weakness in the manufacturing sectors and in employment while the economy which has shown the most improvement since the Iraq War ended is Japan, which suffered the least immediate impact.

"The risk is that the war had less of a role to play in damaging the world economy than was popularly believed and now the war is over we have to come to terms with the reality that economic conditions have continued to deteriorate," said John Shepperd, Global Economist at Dresdner Kleinwort Wasserstein.

"We're looking for the FOMC to cut rates by 50 basis points in June and there is a crying need for a cut in the euro zone."

Both the US Federal Open Market Committee and the European Central Bank have interest rate meetings next week but while most economists expect another cut at some point, they argue next week is too soon.

In the eurozone there was no recovery in manufacturing in April despite an end to the war which had hammered consumer and business confidence and sent oil prices soaring.

Instead figures yesterday from the Reuters survey of euro zone purchasing managers taken between April 14 and 25 showed the lowest reading since January 2002 at 47.8 in April from 48.4 in March, further below the 50 line that divides growth from contraction.

The gloomy news from Europe followed surprisingly grim figures on Thursday on manufacturing and jobs in the United States, the world's largest economy.

The Institute for Supply Management (ISM) said manufacturing contracted for a second straight month in April. Its main index slid to 45.4 from 46.2 in March.

"I think the Baghdad bounce is something of a myth. The US economy wasn't terribly robust before the shooting started and it's not looking much better now," said George Magnus, Chief Economist at UBS Warburg.

The strongest signs of an improvement after the end of hostilities were in consumer confidence in the US, which with Britain led the war to oust Saddam Hussein as President of Iraq. The Conference Board's Consumer Confidence Index soared in April after the war finished to 81.0 from 61.2 but this has yet to be translated into a rebound in retail sales.

Magnus said that if the weak ISM number was echoed in other April data then by June the Fed would be in a position to cut rates by 50 basis points, probably accompanied by some other non-conventional measures such as increased purchase of securities in the secondary market.

"A plain vanilla rate cut is looking less likely as the US economy struggles to gain traction."

Figures on Thursday showed Japan's manufacturing sector expanded for the first time in eight months in April, with output and order books suggesting a tentative return to growth, a Reuters survey said.

The overall index in the Reuters/Nomura/JMMA Purchasing Managers survey rose to 50.1 in April from 48.9 a month earlier but the improvement was export-led and a global slowdown could curtail the improvment.

Moreover some economists said the perky PMI results should be taken with a pinch of salt as the survey was conducted in mid-April, when worries about Severe Acute Respiratory Syndrome (SARS) were still confined largely to the travel and airline industries.

There was also some improvement in Britain's factories after the Iraq war, with a smaller contraction and some glimmers of hope companies may again be able to raise prices, a survey showed on Thursday.

The Chartered Institute of Purchasing and Supply and Reuters said the April factory PMI rose to 48.3 from an upwardly revised 46.3 in March and higher than the 46.7 economists had forecast on average.

It was the fifth straight month below the 50.0 mark that divides contraction and expansion.

The data are sure to provide some relief to the Bank of England that manufacturing, which makes up one fifth of the economy, has at least not deteriorated.

The data were compiled from survey responses between April 11 and 24, after the fall of Baghdad.

Analysts say the recent fall in sterling against the euro may end up having more influence on the economy than the end of the war, helping to ease the pressure on manufacturers by making their goods relatively attractive abroad.

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