By Mike Peacock
LONDON, July 10 (Reuters) - The Bank of England left interest rates on hold despite spiralling inflation as slowing Chinese exports growth and faltering European industry provided further evidence on Thursday that global growth is teetering.
Inflation, fuelled by the sky-high price of oil and other commodities, has spread its tentacles into almost every corner of the world at the same time as economies weaken.
Despite inflation overshooting the UK’s two percent target by a distance, its central bank kept official rates at 5.0 percent, suggesting it expects economic doldrums to rein in prices sooner or later. [ID:L10010239]
Even in Japan, which has battled deflation for years, data showed wholesale prices last month jumped to the highest in 27 years, spelling steeper costs for businesses although they have struggled to pass them on to consumers. [ID:nT2165]
At the same time, U.S. and European growth has been slowing rapidly, with many experts now forecasting technical recessions — two successive quarters of negative growth — at least.
French industrial production fell 2.6 percent on a monthly basis in May, the national statistics office said on Thursday, much more than forecasts for a 0.5 percent drop. [ID:nL1034617]
Similarly, Italian industrial output was much weaker than expected in May, posting the largest monthly drop since September last year, down 1.4 percent on the month.
“Now we are starting to ask ourselves questions more broadly about the euro zone, that is to say we have the impression that the economy is sliding into recession,” said Olivier Gasnier, an economist at Societe Generale.
Those gloomy reports followed a 2.4 percent plunge in German industrial output for May, which also took markets by surprise.
“We will have a bad second quarter,” German Finance Minister Peer Steinbrueck told reporters in Berlin.
The trade surplus in China, the world’s fourth-largest economy which has grown at a heady pace, hit $21.35 billion in June, up from $20.21 billion, but the annual pace of exports was slower than expected at 17.6 percent. [ID:nPEK71486]
“Despite the higher trade surplus, the impact of slowing global demand is evident,” BNP Paribas said in a client note.
Chinese exporters have said they are facing their toughest year in memory because of the combination of rising domestic costs and softer global demand.
A crippling mix of strong inflation and slowing growth has hobbled central bankers worldwide. U.S. rates have been slashed but the European Central Bank has taken the opposite course.
The Bank of Japan is expected to leave its key rate at a meagre 0.5 percent when it meets next week, despite the jump in wholesale prices, warning instead that growth will be slower than it anticipated, according to a Reuters poll of economists.
Analysts said the next move from the Bank of England would be a cut. Until recently, markets had been pricing in one or two rate rises this year to bring inflation back to target.
“Eventually, as growth begins to bite into inflation next year, we see the MPC lowering rates (to 4.5 percent by mid-2009),” said George Buckley, economist at Deutsche Bank.
British house prices fell at their sharpest annual pace in at least two decades in June, a survey showed on Thursday, a downturn that threatens to plunge the economy into recession.
The Bank of Korea was unmoved for the 11th month running at its policy review on Thursday, hoping intervention to prop up its currency will contain price pressures running at their highest in almost 10 years. [ID:nSEO87278]
Stock markets, which had proved remarkably resilient in the face of a global credit crunch over the last year, appear to have got the message. Many leading indices are now in bear markets, having shed 20 percent from their peaks.
World stocks fell back towards this week’s 21-month low on Thursday over fears that top U.S mortgage lenders Fannie Mae FNM.N and Freddie Mac FRE.N need to raise tens of billions of dollars of new capital.
Faced with a dearth of credit as banks hit by the U.S. subprime mortgage meltdown retrench, interest rate cuts have lost much of their power — cheaper money is not much use if people and businesses cannot get their hands on it.
Slowing demand from the euro zone and the United States has been a big factor in Asia’s sluggish export sector. The latest U.S. weekly initial jobless claims are due later.
Singapore’s economy shrank by the most in five years, data showed on Thursday, but economists believe it may be able to skirt a recession, which would be a relief to policymakers there with inflation running at its highest level in 26 years.