This week’s international outlook

United States

Failing investor confidence about the likelihood of a rapid recovery in corporate earnings growth depressed US equities during the week despite indications that the economy had moved out of recession.

US Gross Domestic Product (GDP) rose at an annualised quarterly rate of 5.8% in the first quarter of 2002, its fastest rate since 1999.

However, sales of durable goods such as automobiles, computers and machinery fell by 0.6% in March, according to the Commerce Department. The decline, which followed a 2.7% increase in February, seemed to indicate that the widely anticipated economic recovery was tentative.

New home sales also provided further evidence that economic recovery was at an embryonic stage. Commerce Department data showed that the number of new homes purchased fell for the second time this year, declining by 3.1% on an annual basis in March.

In a speech delivered in New York, Alan Greenspan, Chairman of the Federal Reserve, admitted it was "doubtful" that economic recovery in the US would happen as quickly as originally thought.

AOL Time Warner, the world’s largest media company, reported the largest single-quarter loss in US corporate history. The company lost $54.2 billion after writing down the value of assets acquired when America Online linked up with Time Warner in 2001.

Market conditions in the telecommunications sector continued to be difficult. Both AT&T and Worldcom announced sharply lower profits due to a slump in long-distance sales. AT&T said it expected consumer long-distance sales to fall by more than one-fifth in 2002. Elsewhere, Lucent Technologies, which makes telecommunications equipment, announced it would shed 11% of its workforce in its continuing efforts to reduce costs and restore profitability.

Eastman Kodak reported that sales had declined for a fifth consecutive quarter and, as a result, profits were down by 74% compared with the same period one year ago. The company indicated that it had seen few signs to indicate a recovery was in progress.

United Kingdom

The UK equity market declined over the week as negative news affected some of its largest constituents, specifically in the areas of telecommunications, oil, pharmaceuticals and insurance.

The UK economy should grow by 1.9% this year and by 2.8% in 2003, according to the Organisation for Economic Cooperation and Development.

Confidence among manufacturers lifted for the first time since January 2000. The Quarterly Industrial Trends Survey, compiled by the Confederation of British Industry, showed that a net +21% of respondents were positive in the quarter to April from –31% in the previous period.

Consumer spending continued to be strong. Retail sales rose by 0.1% in March, with the annual rate hitting 5.6%.

National Grid, which owns the UK electricity network, announced it would acquire Lattice Group, the owner and operator of the gas network in the UK, for £12.5 billion. The company said it would use Lattice’s strong cashflow to finance further acquisitions of US electricity transmission businesses.

Administrators for ITV Digital, the troubled digital terrestrial television broadcaster set up by Granada and Carlton Communications, failed in their efforts to find a buyer for the business. The company faced closure or being sold in parts.

Continental Europe

European equities fell during the week as disappointing earnings and further job losses undermined investors’ confidence.

German business confidence, as measured by a survey from IFO, which canvasses business sentiment, declined unexpectedly in March. Concerns over employment have made consumers reluctant to spend and this has hurt retailers and their suppliers. Store sales in Europe’s largest economy fell for a third consecutive month according to February’s data.

Ericsson, the Swedish mobile phone manufacturer, announced further job losses in the wake of its second consecutive loss-making year. The company planned to reduce its workforce by one-fifth or 17,000 jobs by the end of 2003 in an effort to restore profitability. In addition, Ericsson asked its shareholders for an additional $2.9 billion and abandoned its forecast for a rebound in demand during the second half of 2002.

DaimlerChrysler reported that it had restored profitability in the first quarter of 2002. The company posted a profit of $2.4 billion as group-wide cost-cutting measures such as workforce reductions and factory closures yielded results.

Siemens revealed an additional 6,500 redundancies at its loss-making telephone networks division. The division shed 20,000 jobs in 2001.

Japan

Solid gains by technology shares and renewed optimism of an economic recovery initially propelled the Nikkei 225 higher but further progress was checked as the yen strengthened against the dollar later in the week.

The tertiary activity index, which tracks consumer demand for services, fell by 0.4% in February against analysts’ expectations of a 0.5% increase. Rising unemployment and falling salaries caused consumers to cut back personal spending.

Exporting companies were boosted after comments by the finance minister that the government was in favour of a weaker yen. Japan’s three largest car manufacturers (Nissan, Honda and Toyota) all reported higher exports helped by rising US demand and the weaker currency.

South East Asia (excluding Japan)

The Hang Seng had a mixed week but performed strongly on Tuesday as exports rose unexpectedly for the first time in 13 months, raising hopes that economic growth might be revived sooner than expected.

Signs emerged that the recession gripping Singapore’s economy might be ending. Industrial production was reported to have declined by 2.9% year-on-year in March compared with an 11.7% fall in February.

Unemployment in Taiwan rose unexpectedly in March. The jobless rate, which had fallen during the previous month, rose to 5.3% partly due to a move by manufacturers to relocate production to China in order to lower costs.

The Governor of the South Korean Central Bank indicated that interest rates might soon need to rise as inflation risks increased within the economy.

Latin America

Argentina’s economy minister, Jorge Remes Lenicov, resigned after a critical government vote on converting 60% of the banking system’s deposits into bonds was delayed. Banks, which remained closed during much of the week following a run on deposits one week earlier, reopened for non-cash transactions on Friday. The Brazilian Central Bank increased its forecast for inflation in 2002. Price rises were likely to exceed the original forecast of 4.5% due to rising fuel prices and utility rates, the bank’s Monetary Policy Committee said.

Femsa, Mexico’s largest beverage producer, announced that higher beer prices and foreign currency gains had helped first-quarter profits rise by 29% over the comparable period one year earlier.