Real Estate Intellgience Service, Friday, August 14, 2009

Inflation slips to 33-year low

Inflation slips to 33-year low
The Economic Times, August 14, 2009, Page 1 & 7

The annual rate of inflation touched a 33-year low of -1.74% for the week ended August 1, but there was no respite for consumers as poor rains continued to drive up prices of food articles, data released by the ministry of commerce and industry on Thursday showed. The wholesale price index based annual rate of inflation stayed in the negative for the ninth straight week on account of high base effect.

Inflation continues free fall, at 33-yr low
The Economic Times, August 14, 2009,

Our Bureau NEW DELHI

THE inflation rate based on wholesale price index (WPI) fell for the ninth straight week for the week ended August 1, but economists warned it was poised to rise in the months ahead as industrial demand picked up steam and monsoon failure lifted food prices.

The annual rate of inflation fell to a 33-year low of -1.74%, data released by the ministry of commerce and industry showed on Thursday, continuing its trend of the past several weeks and at total variance with the actual inflation experienced by consumers. Consumer price inflation for June stood above 10%.

Kaushal Sampat of Dun & Bradstreet forecast WPI inflation touching 5.8% by the end of the current fiscal year as the base year effect fades away amid increasing commodity prices, rising foodgrain prices caused by delayed monsoon and an expansionary fiscal policy.

The base year effect—inflation had peaked at 12.91% in the corresponding week last year—has continued to depress the headline WPI number in the last eight weeks, although underlying prices have been rising.

The high prices of food items in the retail market don’t get reflected in WPI-based inflation as the segment has only a 15% weightage in the index, which is dominated by manufacturing with a 63% weightage.

Last week, Prime Minister Manmohan Singh had issued the first official warning that emergency measures need to be put in place as the weak southwest monsoon — 25% deficient this year according to the met department — is sure to cut down output from summersown crops that account for half of the country’s food produce.

Data on industrial production released on Wednesday showed a surprise 7.34% jump in factory output in June due to broader recovery in capital goods and consumer durables despite shrinking exports. This, experts believe, will lead to higher demand for raw materials and stoke inflation.

Sensex rises 498 points as recovery signs spread

Sensex rises 498 points as recovery signs spread
The Financial Express, August 14, 2009, Page 1

fe Bureaus, Mumbai

The stock market saw a widespread rally on Thursday on strong domestic and global cues. Buoyed by the surprise 7.8% rise in June factory output and the new direct tax code’s promise of an end to STT and a 5% cut in corporate tax, the market went on a steady climb, with 79.28% stocks advancing and leaving no losers on the Sensex.

Backing the rally were a statement from the Fed that the US economy is showing signs of improvement and news from the Eurozone that Germany and France have come out of the worst recession in Europe since 1945.

Foreign institutional investors pumped in a net Rs 630.94 crore into the market, taking their total investment this month to Rs 7,068.61 crore. Data released by RBI revealed that foreign investment in the April-June quarter surged five-fold to $15 billion, from $3 billion in the previous quarter, in what is seen as a vote of confidence in India’s economic recovery.

As the equity market rose, the rupee strengthened by 26 paise to 48.10/11, from its overnight close of 48.36/37.

The 30-share Sensex of the Bombay Stock Exchange (BSE) posted a solid gain of 498.33 points, or 3.32%, and closed the day at 15,518.49 points. The broader 50-share Nifty of the National Stock Exchange (NSE) surged higher by 147.50 points, or 3.31%, to close five points above the 4,600-mark.

Key Asian equity indices, too, advanced, with Hang Seng gaining 2.08%, Straits Times 1.67% and Taiwan Weighted 1.97%. But the Indian equity market remained the top gainer in the Asia-Pacific region on Thursday.

Global rating agency Standard & Poor’s raised India’s economic growth forecast by 30 basis points to 6.3% for the current fiscal, following the government’s stimulus measures and an improvement in global markets.

The flood of positive news prompted investors to square-off their short position in the derivative markets. According to market experts, institutional investors had sold heavily in the futures market last week, expecting a sharp correction on reports of a weak monsoon in India.

“The immediate trigger for the current rally is US federal Reserves statement that the US economy is improving and its decision to keep interest rate unchanged,” said Vipul Dalal, country head–broking, Elara Capital.

On the domestic side, IIP figures released on Wednesday has given a strong signal that the worst is behind us and India is on the path to a speedy recovery from the current crisis, he added.

In a note issued to its clients, Morgan Stanley said it expects further recovery in industrial output. “In fact, the IIP growth in June 2009 is highest since February 2008. While we expect sustained recovery in IIP growth, the monthly growth numbers do tend to be volatile at times and there could be some retracement in IP growth over the next 1-2 months,” it said.

Despite these positives, market is a little concerned about the monsoon deficit and the spread of swine flu in India. On a cautious note, Dalal said, “Going forward, the market needs to assess the impact of the shortage in rainfall. Moreover, if the spread of swine flu is not contained, it may start impacting commercial activities.”

HDFC PARES LOAN RATES

HDFC PARES LOAN RATES
The Economic Times, August 14, 2009, Page 1

HOUSING FINANCE MAJOR

HDFC has upped the ante for market share by reducing home loan rates by 50 basis points in the Rs 30-50 lakh segment, reports Our Bureau from Mumbai. The move comes within a week of the country's biggest bank, SBI, cutting rates by 50-75 basis points for high-value loans and offering loans up to Rs 5 lakh at a fixed rate of 8% for five years. The rates will apply only to new customers as PLR is unchanged.

HDFC slashes home loan rate

HDFC slashes home loan rate
The Economic Times, August 14, 2009, Page 8

Our Bureau MUMBAI

HOUSING finance major HDFC has upped the ante for market share in the home loan market by reducing rates by 50 basis points in the Rs 30-50 lakh segment. The development comes within a week of the country's biggest bank SBI cutting rates by 50-75 basis points for high value loans, and offering loans up to Rs 5 lakh at a fixed rate of 8% for five years.

As per the revised rates, HDFC now offers loans between Rs 30-50 lakh at 9%. The rates will apply only to new customers as the lender has not revised its prime lending rate. HDFC had last cut rates in mid-July. Since then there has not been any reduction in policy rates by Reserve Bank of India.

SBI, over the past few months, has been increasing market share in the home loan segment. SBI's mortgage loan book has grown Rs 10,076 crore in the 12 months ended May 2009, which is over 77% of the Rs 13,028 crore growth recorded by the banking industry. HDFC now wants to take advantage of the festival season spike in business.

As against HDFC's 9% floating rate, SBI offers an adjustable rate where the home loans up to Rs 50 lakh are available at of 8% for the first year and 8.5% for the second and third year. Thereafter, rates will vary with the prime lending rate.

As a part of the government's efforts to help the ailing economy, several public sector lending institutions like Canara Bank, SBI and LIC Housing Finance, among others, have unveiled competitive schemes to attract home loan seekers. Given the tough competition in the segment, private lenders like HDFC have been forced to also cut rates.

HDFC reduces rates by 50 bps for Rs 30-50L slab

HDFC reduces rates by 50 bps for Rs 30-50L slab
Times of India, August 14, 2009, Page 23

TIMES NEWS NETWORK

Mumbai: Home loan major Housing Development Finance Corp (HDFC) has cut interest rates by 50 basis points (100 basis points = 1%) for the Rs 30 lakh-Rs 50 lakh slab. The new rate for this bracket will be 9% per annum, down from 9.5% earlier, a senior HDFC official said.

Earlier, HDFC had three slabs for home buyers. It charged 8.75% per annum for loans up to Rs 15 lakh, 9% for loans between Rs 15 lakh and Rs 30 lakh and 9.5% for loans of over Rs 30 lakh. Now the mortgage finance major has introduced a new slab of loans at 9% for Rs 15 lakh and Rs 50 lakh. After this rejig, only home buyers opting for loans of over Rs 50 lakh will pay an interest rate of 9.5%. Earlier even home buyers taking loan of above Rs 30 lakh were paying at the rate of 9.5%.

The change in loan brackets are on similar lines recently undertaken by a number of other leading home finance institutions like SBI and Axis Bank where the rejig was done without changing the prime lending rates (PLR). Earlier in mid-July, HDFC had cut interest rates on loans of up to Rs 15 lakh by 50 basis points to 8.75%. Of late, the mortgage lending market has seen a spate of cuts in lending rates, with different payment structures being introduced, including adjustable rate mortgages (ARMs) where the interest rate on repayments are varied periodically based on a number of market-driven factors.

The latest move from HDFC came following an SBI decision last week to cut home loan rates further. The country's largest bank said it was giving loans at 8% in the first year, and for the next two years the rates will be 8.5% to 9% depending on size of the loan.

HDFC cuts home loan rate by 50 bps

HDFC cuts home loan rate by 50 bps
The Financial Express, August 14, 2009, Page 13

Banks and housing finance companies, including Housing Development Finance Corporation (HDFC), the largest housing finance firm in the country, have reduced their rates for loans.

While HDFC has reduced its rates by 50 basis points from 9.5% to 9% for loans between Rs 30 and Rs 50 lakh, the corporation has retained old rates for other categories of loans. The reduction is effective from Thursday, said sources.

Launching its festival season bonanza, Delhi-based Punjab National Bank (PNB) has slashed home and car loans by 50 basis points. Punjab National Bank’s campaign comes a week after SBI’s three-month-long home loan campaign, offering loans at 8%.

“Under the offer, housing loans up to Rs 30 lakh will be available at discounted rate of interest of 8.50% under fixed interest rate option (fixed for three years) across all repayment tenors, besides full waiver of processing (upfront) fee and documentation charges,” Punjab National Bank said in a statement.

The margin also stands reduced to 15% for housing loans up to Rs 20 lakh, it said. On car loans, a rebate of 0.5 % is offered to prospective borrowers under the fixed option. The offer will be valid from Friday till October 31, it added. Right now, the fixed rate of interest offered by bank is 9%.

Bank of India, which has also launched its festive offer, will charge an interest rate of 8.5% for loans ranging between Rs 30 lakh and Rs 50 lakh and 9.25% for the second year.

Similarly, for home loans ranging between Rs 50 lakh and Rs 1.5 crore for a maturity period of five years, the bank will charge an interest rate of 9.5% for the first year and 9.75% for the second year. Subsequently, it will go to floating interest rate, which is 10.25% at the moment, said M Narendra, executive director of the bank.

“As we have recently launched a festive home loan scheme, I think it would help us achieve our target. We already have a special package for home loans, under which we are offering an interest rate of 8.5% for loans up to Rs 20 lakh, which will be increased to 9.25% for the second year and 9.75% for the third year. Subsequently, it will become floating interest rate, which is 9.5% at the moment,” he said.

However, for long-maturity home loans in 10 years under this category, the bank is charging an interest rate of 9.5% for the first year and 10% for the second year.

Big city houses out of middle income group reach

Big city houses out of middle income group reach
The Times of India, August 14, 2009, Page 11

Anshul Dhamija, TNN

BANGALORE: Mumbai, the National Capital Region (NCR) and Bangalore have been found to be the most unaffordable locations for housing for India’s middle-income groups (MIGs).

MIGs, defined as households with annual incomes between Rs 3 lakh and Rs 10 lakh, are unlikely to find their desired kind of homes anywhere close to the city centre in these three metros, according to a study by global property consultancy firm Knight Frank. On the other hand, Kolkata, Pune and Chennai are seen to offer a good number of affordable locations to MIGs.

The study first looks at the factors most important to a consumer in his house buying decision and his budget, and then tries to find locations where these conditions are met. “Mumbai has the worst case scenario for affordable homes. On average, MIGs would have to stay at a distance of 45 km away from the CBD, in areas that have poor connectivity and scant infrastructure, in order to get their ideal affordable home,” says Ghulam Zia, national director in Knight Frank.

This is due to the fact that land prices in the city are so steep that even smaller size units — of about 600 sqft that are acceptable to Mumbaikars — wouldn’t be affordable to MIGs. So buyers will have to settle for places like Panvel, Virar and Kalyan.

Similarly, in NCR, due to the high cost of land, MIGs would have to look beyond Meerut and Sonepat for affordable homes.

In Bangalore, MIGs are seen to be highly concerned about connectivity to their office. “And the problem in Bangalore is that as one starts to move away from the city centre, road and other necessary infrastructure starts to deteriorate,” says Zia.

The survey found that MIGs of Bangalore preferred residential units ranging between 850 sqft and 1,050 sqft in size. Given this preference for large units, very few locations in Bangalore would be affordable for consumers in the Rs 5 lakh to Rs 8 lakh income bracket. Affordable locations include Kanakapura Road, Hebbal, Electronics City, BTM Layout and Whitefield, where it would be possible to find units costing between Rs 15 lakh and Rs 30 lakh.

However, there is seen to be no location in the city at all that can accommodate affordable homes for the income group of Rs 3 lakh to Rs 5 lakh.

Loan demand rising: Kidwai

Loan demand rising: Kidwai
Hindustan Times, August 14, 2009, Page 23

PNB reduces home loan rate by 50 bps

PNB reduces home loan rate by 50 bps
Hindustan Times, August 14, 2009, Page 23

Housing loan, PF in EET net to offset tax sop losses

Housing loan, PF in EET net to offset tax sop losses
The Financial Express, August 14, 2009, Page 2

Surabhi, New Delhi

The finance ministry estimates that scrapping tax deduction on housing loans and bringing provident funds including those for government employees under the EET (Exempt-Exempt-Tax) system will compensate for the lower tax rates proposed in the Direct Taxes Code. A day after the Code was unveiled; the finance ministry is already preparing its stand on the issue, which it expects could lead to huge political opposition .

“You can’t have everything. If tax rates are low, the tax base needs to be widened in order to sustain collections,” a finance ministry official said. The Direct Taxes Code Bill is scheduled to be tabled in Parliament in the Winter Session, where the ministry expects to face a huge debate on these provisions.

The Code, which is expected to come into effect from April 1, 2011, seeks a drastic re-jig of the income tax slabs. The threshold will be Rs 1,60,000 for individual assessees, a 10% tax would be levied on income between Rs 1,60,001 and Rs 10,00,000 while a 20% tax along with Rs 84,000 would be levied on income between Rs 10 lakh and Rs 25 lakh. On annual income over Rs 25 lakh, individual assessees would be expected to pay 30% tax along with Rs 3,84,000.

To make up for this revenue loss, it has suggested scrapping all exemptions for savings instruments, other than the omnibus Rs 3 lakh annual deduction from individual income. The finance ministry estimates given in the budget documents say, the deduction for repayment of housing loans and the savings scheme has cost it Rs 27,389 crore in 2008-09.

The code proposes the EET method of taxation for all savings schemes including approved super annuation funds. According to data with the direct tax department, there are about 2.5 crore income tax assesses in the country, a large percentage of whom use some form of tax savings instruments including the Public Provident Fund as well as the government Provident Fund, Employees Provident Fund and others.

The only exemptions that will continue are for medical and education loans, that together account for Rs 130 crore per year to the exchequer. The Direct Taxes Code also plans to remove area-based and profit-linked exemptions, which account for a large chunk of revenue losses. Instead, it calls for investment-linked incentives for nine activities such as developing special economic zones, exploration of production of mineral oil and natural gas, cold chain facilities. As per the Budget document, the Centre lost out on Rs 68,914 crore of direct tax due to exemptions to corporate.

New tax code to dent housing, fear bankers & realty firms

New tax code to dent housing, fear bankers & realty firms
The Financial Express, August 14, 2009, Page 13

fe Bureaus, Mumbai

The banks and real estate companies are apprehending that the removal of tax benefits on the interest portion up to Rs 1.5 lakh of any housing loan as proposed in the draft tax code will hamper the growth of housing finance and real estate business.

Niranjan Hiranandani, managing director, Hiranandani Constructions, “This is a very wrong decision as world over tax exemption on housing loan is encouraged to provide boost to the real estate sector. Government will have to restore the tax reforms as demand in real estate business will be badly impacted.”

Hemant Shah, chairman, Akruti City said that the new draft tax code will dampen the sentiments of buyers to the extent that tenants who would be looking at buying first time homes on ownership basis will refrain from inquiring.”

Parthasarathi Mukherjee (president, credit), Axis Bank said first time buyers of housing property do not take their decisions based on tax sops and incentives only. The proposed change will not affect them. However, investors or second home buyers are likely to base their decision pertaining to the taxation angle. So, it’s a mixed effect. Thus it’s too early to comment on the overall impact of these changes on housing mortgage business in the country.

M Narendra, executive director, Bank of India also said the first time home loan borrowers will anyhow continue to go for the home loans.

“Only the affected may be those home loan borrowers that are going for the second or third time for the loan. Now we have to see that the interest rates on our home loans are to be kept competitive and the houses must be available at affordable cost, “ he said.

BoI’s home loan portfolio comprises Rs 6,900 crore and it wants to see a growth of 25% in that space by the end of the fiscal.

However Naina Lal Kidwai, HSBC India CEO and group general manager said “I would like to believe that the recent declaration regarding housing tax exemptions in draft direct tax code is not going to affect the growth of housing mortgage in the country. If someone likes to buy a house, he or she does not look at tax exemptions facility usually. The direct tax cuts announced in the bill are major. People are likely to have more money in their hands at their disposal to pay housing loan installments in the longer run.”

Realty, PE funds bet on brownfield projects

Realty, PE funds bet on brownfield projects
The Financial Express, August 14, 2009, Page 5

Mona Mehta, Mumbai

Investing 70% of the Rs 50,000-crore funds in Indian brownfield real estate projects and income generating assets, instead of greenfield projects is the new buzzword among real estate funds (REFs) and private equity (PEs) players in the Rs 10,000-crore real estate market.

Private equity players and funds such as Blackstone, IndiaReit, HDFC, ICICI Securities, Anand Rathi, Motilal Oswal, Morgan Stanley, Lehman Brother, Xander who have been planning to pump Rs 50,000 crore into the overall real estate sector are eyeing Delhi, Mumbai, Pune, Hyderabad, Chennai to fund new developers for their brownfield real estate projects. Brownfield real estate projects are the realty projects happening in city- centric locations where property sales are high with quick returns.

Sanjay Dutt, chief executive officer—business, Jones Lang LaSalle Meghraj (JLLM) told FE, "With the supply of commercial properties set to touch 55 million sq ft by December 2009, there will be an expected demand for 25 million sq ft during the period. Moreover, front office will generate huge demand in comparison to IT parks and SEZ."

The new trend comes at a time when builders are strongly focusing on cluster development of residential projects. Jeetendra Jain, managing director and CEO, Neev Group of Companies said, "We are currently in talks with South Mumbai-based developer to enter into JV with them for developing high rise apartments at an investment of Rs 500 crore where both parties own lands, but would jointly develop projects. The project is expected to be launched in the next nine months and will be ready for possession in the next two years."

Cluster development is an eminently suitable model for the Indian milieu, since it permits developers to optimize the available resource where there is a need for land conservation. Apart from having greater potential for increased environmental sustainability, cluster developments also result in a reduction of costs related to construction and location-related infrastructure. According to Pawan Swamy, managing director (West India) from JLLM, "Property buyers also benefit by the retention of a maximum possible amount of open space, preservation of community and enhanced security. In a congested city like Mumbai, these factors are significant."

After selling ready possession residential properties at Goregaon East in North Mumbai at Rs 3,999 per sq ft, Royal Palms India is now planning to offer ready possesson office and mall space on ownership basis at Rs 3,999 per sq ft at the same location.

Knight Frank puts off plan for India-focused property fund

Knight Frank puts off plan for India-focused property fund
Business Standard, August 14, 2009, Page 3

Raghavendra Kamath / Mumbai

The UK-headquartered Knight Frank Group has put on hold its plans to launch a $250 million (nearly Rs 1,225 crore) India-focused real estate fund due to drastic slowdown in property markets across the world, said informed sources.

“The group is relooking at launching new funds in international markets,’’ said a person in the know.

When asked, Knight Frank India Chairman Pranay Vakil confirmed the development. The offshore fund was supposed to raise investments from high net worth individuals and other investors from the UK.

Last year, the group held discussions with potential investors and started putting in place a management team to run the fund. Knight Frank India executive director Keku Cola was expected to head the new fund, but he has quit and joined the Shapoorji Pallonji group.

According to a report by global research firm Preqin, private equity real estate funds are still struggling to raise capital in the current economic environment. In the April-June quarter, 21 real estate funds made aggregate commitments of $10.3 billion, down 72.16 per cent from the $37 billion in the year-ago period.

The interest from private equity funds has waned due to slowdown in the sector in the past nine months. Only three PE deals, worth Rs 600 crore, have taken place in the realty sector in the past nine months, as against Rs 40,000 crore worth of deals during the same period in 2008, according to Venture Intelligence, which tracks venture capital and PE investments.

Knight Frank India has been operating in the country for the past 12 years and has offices in Mumbai, Gurgaon, Pune and Bangalore, among others. With its US-based real estate partner, Newmark Knight Frank, the global network encompasses more than 165 offices in 36 countries across six continents. It handles $36.1 billion of real estate assets.

S&P's increases growth forecast to 6.3%

S&P's increases growth forecast to 6.3%
Business Standard, August 14, 2009, Page 5

BS Reporter / New Delhi

Rating agency Standard and Poor’s (S&P’s) today raised its India’s growth rate forecast by 30 basis points to 6.3 per cent for the current fiscal on the back of improving global and domestic economic scenario.

Strong domestic demand, which has stood the shocks of economic downturn, has also contributed to S&P’s upward revision of India’s GDP.

The revised figure, however, does not take into account the weak monsoon, which is expected to adversely affect the agricultural growth. Finance Minister Pranab Mukherjee had earlier this week expressed confidence that the country would be able to record more than 6 per cent growth despite drought.

“Though it is premature to gauge the impact of monsoon, I don’t think it will have an adverse effect on the level (of growth) that people are anticipating,” said S&P’s Chief Economist Subir Gokarn at a teleconference. “The reason is that most of the areas that have suffered deficient rains have irrigation possibilities and so the monsoons may not affect overall economic growth,” he added.

Gokarn also said the spread of swine flu might affect some sectors, but its effect on overall economic growth would be limited.

On the policy front, he expected that a neutral monetary policy and softer interest rate scenario would stay for another 2 to 5 months, as inflationary pressures might rise and require policy unwinding.

“Though the inflation situation is benign at present and is expected to be so for some more time, rising oil and commodity prices, along with the excess liquidity pumped into the system, may lead to inflationary pressures and risk economic recovery,” he added.

Moreover, he said the steep growth of 7.8 per cent in the industrial output in June signalled that credit offtake might rise at a much faster rate than thought and surplus liquidity might be absorbed at a much faster pace.

“However, I expect the recovery to be modest, as capital inflows have stabilised to keep liquidity at comfortable levels at present,” he added.

Indian economy has bottomed out: S&P

Indian economy has bottomed out: S&P
The Hindu Business Line, August 14, 2009, Page 15

Our Bureau, Mumbai

The Indian economy has bottomed out and is set for positive growth in 2010, according to Standard & Poor’s 2009 Asia Pacific Mid Year Market Outlook

In view of the fiscal and monetary measures, robust domestic demand, and an overall improvement in the global economy, the rating agency has pegged India’s GDP growth in the 5.8-6.3 per cent range this year and 6.8-7.3 per cent range in 2010. In a teleconference, Dr Subir Gokarn, Chief Economist, S&P – Asia Pacific Region, told the media that macro-economic numbers indicate a turning point in the Indian as well as global economy in the first half of 2009.

Explaining the turnaround, Dr Gokarn said the country’s GDP will be driven by strong domestic consumption, which has been held up by stable rural demand and the recent hike in public sector salaries.

However, he cautioned that high inflation, interest rate pressure and persistent sluggishness in global growth could be a drag on India’s growth.

Asia-pacific region

With a faster than expected growth in demand for credit from the private sector, there is also a possibility that future government borrowing could crowd out private investors.

The swine flu pandemic would have negligible impact on the economy, he added.

Commenting on the growth prospects for the Asia-Pacific region, he said China, India and Indonesia will continue to lead with strong growth in GDP.

China played an important role in the economic turnaround of the region as Asian countries have increased their share of exports to China while decreasing there reliance to the US markets.

However, the US continues to be critical to the growth of the Asia-Pacific region, he added.

Fed says economy is leveling out

Fed says economy is leveling out
Business Standard, August 14, 2009, Page 11

WASHINGTON (Reuters)

The Federal Reserve said on Wednesday the U.S. economy was showing signs of leveling out two years after the onset of the deepest financial crisis in decades and it moved to phase out one emergency measure.

The U.S. central bank also kept its benchmark short-term interest rate steady near zero and said it would likely stay there for an extended period to guide the way to recovery.

The Fed made its clearest statement to date that it sees the recession nearing an end and that shattered financial markets are healing.

"Information since the Federal Open Market Committee met in June suggests economic activity is leveling out," the Fed said, referring to its policy-setting panel. "Conditions in financial markets have improved in recent weeks."

It is the first time since August 2008 that the committee's statement has not characterized the economy as contracting, weakening, or slowing.

Many peg the onset of the crisis to French bank BNP Paribas' move in August 2007 to freeze funds because of problems with U.S. subprime mortgages. In the months that followed, the U.S. economy toppled into the most damaging financial crisis and painful recession in decades, and the economic malaise spread around the world.

"They see the worst with the economy is behind us but they don't want to jump the gun and pull back quickly," said Craig Thomas, a senior economist at PNC Financial Services in Pittsburgh.

The Fed cautioned that the economy remains fragile as employers continue to cut jobs and businesses trim investment.

U.S. Treasury prices fell after the Fed statement in apparent disappointment that the Fed did not increase the amount of debt that it plans to buy but subsequently regained some ground.

However, major U.S. stock indexes flirted with 10-month highs and the U.S. dollar rose against the yen.

The Fed cut interest rates to a range of between zero and 0.25 percent in December and pumped hundreds of billions of dollars into financial markets to stimulate economic activity in aggressive efforts to thwart the recession.

President Barack Obama's ability to implement his health care and environmental reforms partly depend on his administration's ability to turn the economy around with a controversial $787-billion economic stimulus package.

The recession has seen tax revenues fall and spending rise, leading to a record federal budget deficit expected to top $1.84 trillion in the current fiscal year.

Global confidence rises on signs of recovery

Global confidence rises on signs of recovery
Business Standard, August 14, 2009, Page 11

Bloomberg / Singapore

Confidence in the world economy surged to a 22-month high in August on signs the worst global recession since World War II is approaching an end, a Bloomberg survey of users on six continents showed.

The Bloomberg Professional Global Confidence Index jumped to 58.12 this month from 39.13 in July. It is the first time the reading exceeded 50, which means optimists outnumber pessimists. A measure of US participants’ confidence in the world’s largest economy rose to 47.3 from 29.5, the survey showed.

“It’s clear the recession is over and some kind of recovery is underway,” said Nick Kounis, chief European economist at Fortis Bank Nederland Holding NV in Amsterdam, and a regular survey participant. “We have the biggest monetary and fiscal stimulus policy in history, globally, and we’re starting to see it work. Probably the next debate will be about how strong and sustainable the recovery is.”

The MSCI World Index has increased 12 per cent in the past month and President Barack Obama said last week’s unexpected drop in the US unemployment rate indicates the worst may be over. Nobel Prize-winner Paul Krugman said August 10 that the world, now in a “rough stabilisation” mode, has averted another Great Depression.

The survey of more than 2,300 Bloomberg users was conducted between August 3 and August 7. Since the previous survey, the US jobless rate declined, second-quarter growth in the US and China was better than expected, and the European Central Bank held interest rates at a record low.

US payrolls fell by 247,000 in July, after a 443,000 loss in June. The jobless rate unexpectedly dropped to 9.4 per cent from 9.5 per cent. The Standard & Poor’s 500 Index closed above 1,000 for the first time since November last week.

The US economy will expand 2 per cent or more in four straight quarters through June, the first such streak in more than four years, according to the median forecast in the monthly Bloomberg News survey.

Analysts lifted their estimate for the third quarter by 1.2 percentage points compared with July, the biggest such boost in surveys dating from May 2003.

In Europe, a recession is also showing signs of bottoming out. ECB President Jean-Claude Trichet said on August 6 that the euro-region economy will show a “gradual recovery” followed by a return to growth in 2010. The gauge for Western Europe rose to 41.1 from 31.

Manufacturing and service industries in Europe contracted at a slower pace in July and business confidence in Germany, its largest economy, rose for a fourth month. Linde AG, the world’s second-largest maker of industrial gases, forecast business to pick up in the second half of 2009 from the previous six months, it said August 3.

“Government and central bank measures are starting to show an impact,” said Peter Leonhardt, an analyst at Dekabank in Frankfurt, and a regular survey participant. “Sentiment is improving much faster than expected. There’s a need to catch up after a deep slump.”

In Asia, respondents were more optimistic, with the index reaching 74.2 from 59.4. Goldman Sachs Group Inc this week raised its forecast for China’s 2009 economic growth to 9.4 per cent, and said Asian nations excluding Japan will expand faster than earlier expected as well.

The CLSA China Purchasing Managers’ Index reached the highest level in a year last month. Samsung Electronics Co, Hyundai Motor Co and LG Electronics Inc are among South Korean exporters that reported increased profits last quarter.

“A lot of the recovery we see in Asia is driven by government spending and restocking,” said Tai Hui, head of Southeast Asian economic research at Standard Chartered Plc in Singapore. “We need a genuine recovery or stabilisation in consumer spending and private investment to ensure the slack will be picked up when the fiscal policy fades away and the restocking phenomenon disappears.”

Confidence also rose in Japan, where the economy is forecast to have expanded for the first time in more than a year last quarter. Elections in the world’s second-largest economy at the end of the month may result in a victory for the opposition Democratic Party of Japan, which has never held power. The index for Japan climbed to 50 from 34.1.

Bloomberg users became more optimistic on the outlook for their equity markets in the next six months. Respondents in Japan, the UK and Italy predict stocks will extend gains, while those in the US and Germany are mixed about the direction of their markets. The global equity rally has added more than $15 trillion to the value of global stocks since this year’s low on March 9.

“Risk appetite is returning to a much more normal level,” Standard Chartered’s Hui said.

The US dollar may weaken in the next six months against the world’s most active currencies, with the index falling to 38.8 from 43.8 in July, the survey showed.

Users in Japan are divided on the direction of the yen against the dollar, with the index dropping to 50.3 from 59.6. Most respondents in Western Europe are more optimistic the euro will strengthen against its US counterpart.

Survey participants in the US, Japan and Western Europe are also more confident short- and long-term interest rates will rise in the next six months, the survey showed.

The Federal Reserve will forego raising its benchmark rate until the third quarter of 2010, according to the monthly Bloomberg survey. Bank of England Governor Mervyn King on Wednesday said inflation may miss the central bank’s target over the next three years, signaling investors may have to rein in expectations for interest rate increases.

Globally, “it’s too early to start tightening policy,” Kounis of Fortis Bank said. “In general, it’s not something that should be considered this year.”