Mixed data for world economy

Fairfax Media

RECOVERING? Economic caution flags rose over the United States as reports raised questions over the strength of a possible recovery.

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Economic caution flags rose over the United States as reports raised questions over the strength of a possible recovery in the world's No 1 economy, but news from the euro zone and Britain was upbeat.

Federal Reserve Board Chairman Ben Bernanke also threw a damper on the optimism of recent days, warning that rising US debt was contributing to a spike in longer term interest rates, and it was time to reign in deficits.

But Bernanke, speaking before the US House of Representatives Budget Committee, also gave a relatively upbeat assessment on the economy, saying, "We continue to expect overall economic activity to bottom out, and turn up later this year."

From Europe, the euro zone's dominant service sector shrank at a slower pace in May and Britain's service sector also improved, returning to growth in May while new car sales in Germany were said to have risen 40 percent in May.

But two reports - revised data showing a record fall in first-quarter euro zone GDP, and producer prices for April - gave timely reminders that European economies are still very much at a low point.

And US data was also discouraging. Companies axed 532,000 private sector jobs in May, according to ADP Employer Services, more than economists had expected but fewer than in April. April's data was revised by ADP to show more cuts than previously estimated, 545,000 instead of 491,000.

Planned layoffs at US firms, however, fell for a fourth month in May, reaching the lowest level in eight months.

SERVICES SECTOR

The US services sector shrank again in May, more than economists expected. The Institute for Supply Management's index edged up to 44.0 in May from 43.7 in April, while economists expected a reading or 45. A number below 50 represents contraction.

And the spiking interest rates that Bernanke warned about, which have surged to their highest level since late January, helped send US mortgage applications down last week by 16 percent.

The report from the Mortgage Bankers Association was particularly worrisome as a recovery in US housing, where the global financial crisis began, is seen as the linchpin to a wider economic rebound.

New orders received by US factories rebounded in April, according to government data, but the previous month's figure was sharply revised downward. The Commerce Department said factory orders rose 0.7 percent in April after a revised 1.9 percent drop in March, the second increase in the last three months.

Markets pulled back. The Standard & Poor's 500 Index fell 1.3 percent. The pan-European FTSEurofirst 300 was down 2 percent. Earlier, stocks in Tokyo rose, with the Nikkei 225 index closing up 0.4 percent to an eight-month high.

Oil futures were down 3 percent, trading above $66.

The US dollar, which had been near a recent 2009 low on growing investor appetite for risk, rose as Reuters reported that leading Asian countries see no alternative to the US unit as the world's main reserve currency.

But Bank of Japan policy board member Hidetoshi Kamezaki warned of downside risks to the economy and said long-term bond yields should reflect the outlook. "It's desirable for long-term interest rates to move in a way that is consistent with the economic and price outlook," he said.

MAY BETTER IN EUROPE

Markit revised its Eurozone Services Purchasing Managers Index to a seven-month high of 44.8 for May from the first estimate of 44.7, above April's 43.8 and forecasts of 44.7.

It said business expectations rose to a 15-month high on hopes the worst of the recession was over, and, if the trend continued, the service sector would return to growth by August.

"The expectations component increased very sharply in May suggesting that the run of increases will probably continue in the coming months," said BNP Paribas economist Ken Wattret.

A survey from leading British mortgage lender Nationwide Building Society showed consumer confidence at a six-month high.

German new car registrations in May, helped by cash incentives for buyers to junk old cars, rose 40 percent year-on-year in Europe's biggest market to around 390,000 units, sources familiar with the data said.

Eurostat said January-March output in the euro zone shrank a record 2.5 percent quarter-on-quarter, in line with an earlier reading issued on May 15, the result of plunging corporate investment and exports. It revised the annual fall to 4.8 percent from 4.6 percent.

Eurostat also said factory gate prices logged their biggest annual fall on record in April, the 4.6 percent figure pointing to negative inflation in coming months and more monetary easing from the European Central Bank.

Australia's economy grew a stronger-than-expected 0.4 percent in the first quarter as the best trade performance in almost half a century helped offset a slump in business and housing investment.

The Latvian treasury failed to sell any of the 50 million Latvian lats (NZ$158.2 million) offered for sale amid worries about the currency, which some fear faces a devaluation, and amid central bank buying to keep the lat within its peg to the euro.

- Reuters