June 10 - 16, 2002

FOREIGN INVESTMENT IN US DROPS 60PC

Foreign investment in the United States suffered a precipitous 60-per cent drop in 2001, as the US market lost some of its lustre due to an economic recession and terrorist attacks , according to the latest government figures.

Foreigners plunked down $132.9 billion last year to acquire or establish businesses in the United States, down from a record $335.6 billion invested here in 2000, said the Commerce Department's Bureau of Economic Analysis.

"The decrease reflected weakness in the US and world economies and a sharp drop in overall merger and acquisition activity worldwide," the bureau said in a report made public on Wednesday.

The figure marks the steepest drop in foreign investment in a decade and, according to some analysts, could make financing the fledgling US economic recovery more difficult because US domestic savings are traditionally low.

Foreign-owned assets in the United States currently total $9.4 trillion while US claims on the rest of the world amount to $7.2 trillion, according the White House Council of Economic Advisers. But US officials noted that despite the decrease, the current level of foreign investment in the United States was still higher than in any year prior to 1998.

Surprisingly, the most dramatic vote of no-confidence came from Britain, one of the closest US allies, whose capital outlays plunged from $110.2 billion in 2000 to $16.6 billion one year later. Other Europeans shunned the US market almost as much.

If French entrepreneurs plowed into the US economy $23.7 billion in 1999 and another $26.1 billion in 2000, their investments plummeted last year to just under five billion dollars.

Germany, the European economic powerhouse, followed the general trend, although at a slower pace.

Its direct investments into the US economy were down to $12.8 billion in 2001 from the $18.4 billion registered the year before.

JAPAN OUT OF RECESSION

The Japanese economy has emerged from recession, with its highest growth figures for two years.

Gross Domestic Product grew at a rapid 1.4% from January to March, an annualised rate of 5.7%.

That is a better performance than even the United States.

But analysts say a sustained recovery remains unlikely.

The strong performance in the first quarter was largely due to renewed demand for Japanese exports from the US.

Cars and electronic goods have done particularly well, made more competitive by a cheaper yen.

There was also growth in domestic demand, although that was helped by unseasonably warm weather.

And analysts also question the reliability of the figures. Few expect sustained growth in consumer spending.

The markets have shrugged off the new data, partly because it was widely expected, but also because they have seen it all before.

Previous growth spurts during Japan's 12 years of stagnation have quickly petered out.

"The economy hit a floor faster than many people had anticipated," said Taro Saito, senior economist at NLI Research Institute.

"But I don't expect such strong growth in April to June. It will be much lower, probably closer to zero."

The economy remains heavily dependent on foreign markets, particularly the US, and deeply routed structural problems have yet to be addressed.

Promising new businesses are still being starved of capital, while unproductive, and heavily indebted construction companies and retailers are kept afloat.

Even the strong export performance is now under threat from a weakening dollar.

ECB LIKELY TO POSTPONE RATE RISE

The European Central Bank (ECB) is unlikely to join the global charge towards higher interest rates, when it reveals its latest decision later on Thursday.

Most pundits tip the ECB to begin raising rates at some point this year, following the lead of a swathe of central banks around the world, from Sweden to Australia.

But its two closest counterparts, the US Federal Reserve and the Bank of England, have postponed rate rises so far.

And the patchy nature of Europe's economic recovery indicates that lower interest rates may be beneficial for some time to come.

Since November last year, the ECB's key refinancing rate has stood at 3.25%, its lowest level since February 2000.

EU MINISTERS SEEK CURB ON LOANS TO BIG CORPORATES

European Union finance ministers on Tuesday approved a capital increase at the European Investment Bank but told it to curb lending to creditworthy corporates as a condition.

In what amounted to a mild slap on the wrist for the triple-A rated financing arm of the EU, ministers also said the bank should make its new money last "at least" five years.

The decision to increase the EIB's capital to 150 billion euros from 100 billion euros removed a risk the bank could have run against its lending ceiling — set at 2.5 times its capital.

But ministers expressed frustration they were being asked to approve another capital increase only four years after the last.

"This capital increase should do for at least five years. That's what we agreed," acting Dutch Finance Minister Gerrit Zalm said.

Austrian Finance Minister Karl-Heinz Grasser also said ministers emphasised the money should last five years.

UK INTEREST RATES LEFT ON HOLD

The Bank of England has kept interest rates unchanged at 4.0% for the seventh successive month.

The decision, which had been expected by most City analysts, follows concerns over the robustness of the UK manufacturing revival.

And it leaves interest rates at their lowest rate for about 40 years.

But, with retail and housing markets buoyant, observers believe a rate rise is imminent, with some forecasters putting rates above 5.0% by the end of the year.

Ross Walker, economist at Royal Bank of Scotland said: "The decision is very much as expected but it starts to get quite interesting from here on."

MORE SIGNS OF US RECOVERY

There is more evidence that the US economy is recovering.

The services sector has grown at its fastest pace for nearly two years, according to the latest figures.

The Institute for Supply Management (ISM), said its monthly non-manufacturing index of activity rose to 60.1 in May from 55.3 in April.

That was higher than analysts had been expecting.

An index figure over 50 shows expansion while a figure below 50 indicates contraction.

Services make up two-thirds of the US economy and the index covers everything from entertainment to financial services.

Economists said that the headline index overstated some of the strength in the survey's other components.

But Stephen Stanley, senior market economist at Greenwich Capital Markets said: "It's consistent with a decent growth rate in the economy."

IMF PRAISES ARGENTINA REFORMS

The International Monetary Fund (IMF) has said it will resume talks about fresh loans for the troubled Argentine economy.

Argentine President Eduardo Duhalde's aim is to secure initial loans of $9bn (£6.2bn) which would be used to stabilise the country's economy.

Earlier this week, the Fund's Managing Director Horst Koehler said that an agreement could be reached within 45 days.

DEUTSCHE GRANTS KIRCH LOAN EXTENSION

Deutsche Bank has given the failed Kirch media group three months to sell its stake in the Axel Springer Verlag newspaper publisher and repay its 720m euros debts.

The loan is secured against the 40% stake in the publisher of the top-selling Bild newspaper.

If Kirch fails to pay the debt on 30 August, the bank is expected to demand that the Axel Springer shares are handed over.

Deutsche Bank would then be expected to sell the shares via the stock market.

SCOTS 'MORE SUPPORTIVE' OF EURO

People in Scotland are keener to see the pound scrapped and the euro introduced than anywhere else in the UK, new research suggests.

The UK-wide survey of 2,000 people shows 57% against Britain joining the European single currency, with just 21% in favour.

Another 14% are undecided, according to the poll, while 8% do not care either way.

But when those figures are broken down on a regional basis, 28% of people in Scotland are in favour of the euro, closely followed by 25% in London.

CANADIAN OFFICIAL'S OUSTING STIRS CONCERN

Canada's pristine political reputation going into the next round of Group of Seven (G7) talks has been tarnished by the recent forced ousting of its much-respected finance minister.

The political turmoil caused by Prime Minister Jean Chretien's firing of Paul Martin has caused stirrings of doubt about what image the country will present at the upcoming meeting of G7 finance ministers, to be held later this month in Halifax, Nova Scotia.

SOUTH AFRICA CLEARS WAY TO SELL TELKOM

The way has been cleared for South Africa's biggest privatisation to date — the $1bn sell -off of the country's mainly state-owned telephone operator Telkom.

Recently Telkom and the industry regulator ICASA (Independent Communications Authority of South Africa) have been arguing over Telkom's increased charges to its customers.

They have now reached an agreement, thereby clearing an obstacle to the government's move.

BANGLADESH BUDGET TARGETS EDUCATION

Bangladeshi Finance Minister Saifur Rahman has announced big increases in spending on education and information technology.

Presenting the 2002-03 budget to MPs, Mr Rahman estimated total outlay at 450bn taka ($8.15bn), a 13% increase in expenditure on the current financial year.

He said his budget was aimed at achieving faster economic growth and at reducing poverty.

Top priority was given to education and the IT sector, which will receive 15% of the total budget.

Spending on defence went up too, and will account for 39bn taka, or 8.8% of revenue income.

CHINA MOVES TO BLOCK INTERNET PORTALS

Some of China's leading internet sites have been punished for failing to control what the government terms "harmful information."

Beijing carried out one of its largest law-enforcement check-ups of the internet ahead of the 16th Chinese Communist Party National Congress, which meets in the autumn.

Ten major domestic web portals were targeted, with Tom.com, Sina and FM365 due to undergo regular inspections over the next three months.

AIRPORT HOME FOR ROLLS-ROYCE FACTORY

Rolls-Royce has confirmed it plans to build an £85m manufacturing centre close to Glasgow Airport in a move which will safeguard 1,000 jobs.

Inchinnan has been identified as the favoured location as the replacement for its existing Hillington factory.

The company confirmed its plans to build a new plant in Scotland in April, but said it was considering a number of possible sites.

US AGENCY MAY REVOKE ENERGY LICENCES

A regulatory agency of the US government has threatened to revoke the electricity-trading rights of four energy firms for improperly providing information concerning its probe into sham trading.

The Federal Energy Regulatory Commission (FERC) says four firms failed to hand over to the agency documents that would help in its investigation into the power crisis that gripped California in 2000 and 2001.

The four firms, Avista Corp, Williams Companies, Portland General Electric Co and El Paso Electric have 10 days to respond to the agency's charge or be prevented from participating in electricity markets.

SECURICOR PROFITS UP

UK security firm Securicor has seen profits rise 13% in the six months to March, despite problems at its US aviation arm following 11 September.

Argenbright, its stand-alone US airport security firm, reported a net loss of £13.1m, compared to a £10m profit for the same period last year.

BRITISH GAS ACCUSED OF SCARE TACTICS

British Gas has been accused of threatening to force its way into customers' homes to read their meters, even when the company itself has failed to keep an appointment.

The Consumer's Association magazine Which? says it has evidence from several upset customers who were threatened with forced entry.

TOYOTA 'CLOSE TO CHINA DEAL'

Japan's top car maker, Toyota Motor, is close to an alliance with China's FAW Group to build luxury cars for the local market, according to media reports.

The Nihon Keizai Shimbun, a respected Japanese newspaper, reported that the two firms planned to set up a car plant in Tianjin, by 2005.

RETAIL GIANT BEATS TARGETS

Dutch supermarkets group Ahold, the world's third-biggest retailer, has posted profits above market expectations for the first three months of the year.

The firm earned 328m euros (£211m; $308m) in the quarter, up 4% year on year, and said that it was on course to enjoy 15% profit growth in 2002.

50-YEAR MORTGAGES 'ON THE WAY'

Mortgages in the UK might have to double in length to 50 years if repayments are to remain within the reach of normal homebuyers, a leading mortgage broker has warned.

Days after the Halifax bank reported a 4.2% rise in house prices in a single month — making an annual rise of nearly 20% — Charcol said that the current 25-year mortgage is rapidly becoming impossible to repay.

Whether or not house price inflation moderates, Charcol said it is still overwhelmingly likely to stay ahead of wage inflation, which at the moment is below 5% a year.

As a result, the only way mortgages will remain affordable is by increasing the term to 30, 40 or even 50 years.