While you were sleeping: Milder US contraction, Libor at record low

Monday 3rd August 2009

The world’s biggest economy contracted a less-than-expected 1% in the second-quarter leaving intact optimism that growth will return in the second half of the year.

The Dow Jones Industrial Average climbed 0.2% to 9171.61 on Friday, rounding out an 8.6% monthly gain, the biggest for July since 1989 while the Standard & Poor’s 500 climbed 0.1% to 987.48 for a 7.4% monthly advance.

The decline in US second-quarter gross domestic product, which was less than the forecast 1.5% contraction, followed a 6.4% slump in the first three months of the year, the largest drop since 1982.

The International Monetary Fund, in its annual report on the US economy, predicted GDP would shrink 2.6% this year before expanding 0.8% in 2010. While there were signs the recession was ending, rising unemployment and a weak housing market would ensure the recovery was slow, the IMF said.

It urged the US government to retain its fiscal stimulus measures for longer.

The US economy contracted for a record fourth straight quarter in the three months to June 30 and some indicators showed it has a long way to claw back to growth. Consumer spending, which makes up more than two-thirds of the US economy, fell at a 1.2% pace in the second quarter.

President Barack Obama predicted it would be many more months before the economy fully recovered as companies continued to shed workers. In his weekly radio and internet address he said the GDP data showed the slump was “deeper than anyone thought” when he took office in January.

“History shows that you need to have economic growth before you have job growth.”

America has lost 6.5 million jobs since the recession began in December 2007 with the rate of unemployment expected to rise further from the 9.5% rate in June.

Crude oil jumped almost 4% on Friday and the US dollar weakened against the euro as investors took heart from the smaller drop in US GDP. The price of copper rallied as metals climbed.

US crude rose US$2.51 to US$69.45 a barrel while London Brent crude gained US$1.59 to US$71.70 a barrel. Spot gold rose US$19 to US$952.30.

The euro advanced 1.3% to $1.4247 on Friday, the biggest gain in more than a month, and climbed 0.4% to 134.94. The greenback slipped 0.9% to 94.66 against the yen. The ICE Futures US dollar index, which tracks the greenback against a basket of six major currencies, fell 1.3% to 78.291.

Interbank cost of borrowing euros and dollars fell to record lows on Friday. Three-month euro Libor fell about 1 basis point to 0.8618% while three-month dollar Libor fell 0.3 basis points to 0.4793%.

Still, data showed credit offered by banks still isn’t reflecting the flood of money made available to lenders. Loans to companies in the Euro region rose at the slowest annual pace on record in June, according to European Central Bank figures.

ECB policymakers are expected to keep the benchmark rate at a record low 1% this week.

Stocks in Europe weakened on Friday, with the Dow Jones Stoxx 600 Index declining 0.2% to 224.91. The UK’s FTSE 100 slipped 0.5% to 4608.36 and France’s CAC 40 fell 0.3% to 3426.27. Germany’s DAX 30 declined 0.5% to 5332.14.

Businesswire.co.nz

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