Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


US growth slows in second quarter
By Robin Harding in Washington
Copyright The Financial Times Limited 2010
Published: July 30 2010 14:03 | Last updated: July 30 2010 20:25
http://www.ft.com/cms/s/0/a7b55d0a-9bd2-11df-9ebd-00144feab49a.html


US growth slowed to an annualised rate of 2.4 per cent in the second quarter but robust business demand suggested that the economy would avoid a feared “double dip” that could drag the world back into recession.

Friday’s preliminary gross domestic product estimate from the Bureau of Economic Analysis showed growth below market expectations of 2.6 per cent and down from an upwardly revised rate of 3.7 per cent in the first quarter.

Consumption growth fell to 1.6 per cent from 1.9 per cent, which reflected the lack of new jobs, and implied that the recovery still cannot sustain itself.

The weakness of growth is disappointing for this stage in a recovery. If data in the coming weeks do not show job creation fast enough to cut a 9.5 per cent unemployment rate, then the Federal Reserve will feel pressure to ease monetary policy.

President Barack Obama, noting the economy had been growing for a full year, called the GDP numbers “a welcome sign compared to where we were”. But he added: “We’ve got to keep on increasing that rate of growth and keep adding jobs so we can keep moving forward.”

The US release came on top of soft data from around the world, including higher unemployment in Spain, France and Japan, a rise in the eurozone inflation rate from 1.4 to 1.7 per cent, and a 1.5 per cent dip in Japan’s industrial production in May.

But economists said a dip back into recession was unlikely for the US.“It is not quite as bad as it looks at first glance,” said Paul Ashworth, senior US economist at Capital Economics in Toronto.

The strength of investment – up by 29 per cent annualised over the previous quarter – suggested that business confidence was not too badly shaken by the fiscal crisis in Europe.

The biggest drag on growth was a surge in imports: net trade subtracted 2.8 percentage points from the growth rate. An appetite for imports, however, suggests demand in the economy is strong rather than weak.

The BEA also increased its estimate of the depth of the US recession, making it the most severe since 1947. It cut its growth numbers by 0.2 percentage points for 2007, 0.4 percentage points for 2008 and 0.2 percentage points for 2009.

The stock market reaction was muted. The S&P 500 index edged up .01 per cent to close 1,101.60, but down 0.09 per cent for the week.

Additional reporting by Michael Mackenzie in New York





China closer to becoming second-largest economy
By Mure Dickie in Tokyo and Jamil Anderlini in Beijing
Copyright The Financial Times Limited 2010
Published: July 30 2010 18:53 | Last updated: July 30 2010 18:53
http://www.ft.com/cms/s/0/fd4430da-9bfe-11df-a7a4-00144feab49a.html


A senior Beijing official’s reference to China as the “world’s second-largest economy” has sparked excited speculation that Asia’s new powerhouse may have already reached a long-looming milestone by surpassing Japan.

China’s rapid recent growth has made it increasingly likely that its gross domestic product, in US dollar terms, will be larger this year than Japan’s. However, the vagaries of international currency movements mean such a result is far from assured.

Observers eagerly awaiting what will be a symbol of shifting global economic power on Friday seized on a remark by Yi Gang, director of the State Administration of Foreign Exchange, about China’s growth prospects.

“China is in fact already the second-biggest economy. With the expansion of the economic base, the growth rate should certainly gradually slow down,” Mr Yi, who is also deputy central bank governor, said in an interview on the Safe website.

However, Mr Yi’s comment fell far short of formal seizure of a title that Japan has held for just over four decades, especially given that he did not specify whether he was talking about China’s GDP at market prices or in purchasing power parity terms.

In PPP terms, often a more telling measure of economic weight, China has already been the second-largest economy for years.

China-based economists point out that Tokyo reports detailed and relatively accurate economic data. Beijing’s sketchier numbers potentially under-report its economy by as much as 20 per cent, meaning China may have really been number two for some time, even in dollar terms.

Even using official data, the baton is seen as likely to be decisively passed this year. In 2009, Japan’s gross domestic product was worth about $5,080bn, while Chinese GDP was initially reported to be not far behind at about $4,900bn.

“Mr Yi is stating the obvious; if China has not already overtaken Japan at this moment in time then it will very soon,” said Arthur Kroeber, managing director of Dragonomics in Beijing.

“This has news value but no economic value,” said Dong Tao, chief China economist at Credit Suisse. “At some point this year China’s economy will overtake Japan’s as world’s second-largest economy in nominal dollar terms; the only thing potentially stopping it right now is the strength of the yen.”

Despite Mr Yi’s apparently throw-away remark, Beijing is also unlikely to want to make too much of a fuss about its new status.

“China needs to adjust to its new status but it is not quite ready for it and would like to put it off as long as possible,” Mr Kroeber said.








Lloyds to lead way with £1bn in profits
By Sharlene Goff, Patrick Jenkins and Kate Burgess
Copyright The Financial Times Limited 2010
Published: July 30 2010 22:29 | Last updated: July 30 2010 22:29
http://www.ft.com/cms/s/0/331c2ea2-9c21-11df-a7a4-00144feab49a.html


The fortunes of Britain’s biggest banks have undergone a startling turnround, with profit growth at the state-backed Lloyds Banking Group set to eclipse that of the former industry star Barclays when they reveal their first-half results next week.

The resurgence of Lloyds, which is expected to post a profit of about £1bn for the first half, will bolster the position of Eric Daniels, the bank’s chief executive, who narrowly escaped a botched attempt to oust him in the spring.

Mr Daniels has since secured the backing of the bank’s board, its chairman and UK Financial Investments, which oversees the government’s 41 per cent stake, to stay in his job indefinitely. “Everyone sees that he’s a good operator,” said one person familiar with UKFI’s thinking.

Mr Daniels has come under fire since he helped engineer Lloyds’ controversial purchase of HBOS in 2008 but has refused to step aside.

Sir Win Bischoff, Lloyds’ chairman, now echoes Mr Daniels’ insistence that there is no timetable for the chief executive’s retirement. People close to Mr Daniels say he wants to stay for at least two years.

Lloyds’ return to profitability in the first half starkly contrasts with almost £4bn of losses in the same period last year. It has been driven by a forecast drop of more than 50 per cent in bad debts. Weaker competition has also allowed lenders to push through higher prices.

The trend in falling loan losses will also be evident at Royal Bank of Scotland, Barclays and HSBC, although it will be offset by a washout second quarter for investment banking.

Barclays Capital, the bank’s former growth engine, may be a big victim of the slowdown, with some analysts expecting a near halving of top-line revenues in recent months. Overall, Barclays is expected to announce underlying pre-tax profits of about £3.5bn, up from £2.75bn a year ago.

Analysts expected the difficult market conditions for investment banks to have slowed the pace of restructuring at RBS, although the bank hopes to announce the sales of its retail branch network and its payments processing business with its results, which could net in excess of £3bn.




Strikes and ash take their toll on BA
By Rose Jacobs
Copyright The Financial Times Limited 2010
Published: July 30 2010 08:01 | Last updated: July 30 2010 22:22
http://www.ft.com/cms/s/0/268c614a-9b9d-11df-9ebd-00144feab49a.html


British Airways suffered another quarter of losses as it was hit by cabin crew strikes and the volcanic ash cloud that closed large parts of European airspace for six days in April.

But the flag carrier showed strong growth in profit margins as more business-class seats were filled.

After losing almost £1bn in the past two years, the airline said pre-tax losses for the three months to the end of June had been £164m. Losses in the same period of 2009 were £148m.

Putting aside the ash cloud and industrial action, Mr Walsh said BA’s underlying financial performance had improved. Profit margins rose 13.5 per cent in the quarter from the same period last year, beating some analysts’ forecasts.

Other airlines were affected by the ash cloud, with Ryanair and EasyJet both reporting related losses in the tens of millions of pounds, but only BA had to cope with protracted strikes by flight crew. The impact of the disruptions came to £250m in the quarter – in line with the company’s previous estimates.

New talks will take place next week between BA and the Unite union in the long-running dispute over cabin crew staffing and pay. BA’s “final offer” was rejected by the union in July, but Willie Walsh, BA chief executive, said on Friday that low turnout at the vote “gives us reason to be optimistic that we’ve got the basis of a settlement”.

“Maybe yields are recovering slightly ahead of where we thought they would, but not a lot,” Mr Walsh said. He expects smaller increases later in the year, as airlines start adding routes back to their schedules.

BA said the UK pensions regulator had approved its plan to cut its pension deficit. The move should help ease the way for its merger with Spanish carrier Iberia next year. Shares in BA rose 1.7 per cent to 219.6p.

● FT Comment
If you’ve got appetite for risk, airlines – hostage to both freak events such as volcanic eruptions and more predictable economic downturns – are not a bad place to start. Yet BA is looking a less risky prospect these days. The wind seems to have gone out of the union’s sails, with less than half of Unite members voting on management’s latest offer. In the meantime, the cabin crew staffing changes have taken effect, saving the company £17m in the first quarter, annualised to almost £70m.

That could make the difference between a small profit and a small loss in 2011. Analysts put BA’s year-end enterprise value to ebitda anywhere from 4 to 6 and higher. Compared with Air France’s EV/ebitda of 6.9, that suggests BA might be undervalued.