In this issue:

Bundesbank President: Forget About a Quick Recovery

British Workers Face Mandatory Retirement, Pension Cuts

Indonesia Signals Move Out of Dollar; Will Asia Follow?

Asian Airlines, Airports Collapsing Due to SARS Crisis


From Volume 2, Issue Number 16 of Electronic Intelligence Weekly, Published Apr. 21, 2003

World Economic News

Bundesbank President: Forget About a Quick Recovery

Just because the war in Iraq might soon come to an end, doesn't mean there will be a quick recovery of the world economy, warned Ernst Welteke, president of the German Bundesbank, and member of the ruling SPD party. He was speaking April 16 at the Levy Economics Institute of Bard College in New York City on the theme "A European perspective on the world economy." The present state of the world economy, Welteke said, "is characterized by unusually high uncertainty.... The ongoing war in Iraq is weighing on the world economy. Financial markets are fickle; confidence among businesses and consumers remains subdued," he said.

"We must, however, not be fooled into regarding the war in Iraq as the sole source of uncertainty or the predominant issue for the world economy. Uncertainty was around before that war was on the horizon, and uncertainty will stay on for a while even after a—hopefully fast—end to the war. What is more, uncertainty stemming from geopolitical strife seems to be deflecting our focus from some fundamental imbalances."

The "fragile" world economy is "depending far too heavily" on U.S. demand at a time when there are alarming "weaknesses" in the U.S. economy itself: "The balance sheets of businesses and consumers are debt-laden, while the public sector also has returned to dissaving. In the environment of weak capital spending, the current account deficit of 5% of GDP is no longer investment-driven. Therefore, it is more of a concern for me now than it was during the last couple of years. More recently, the equity markets' boom-bust scenario has left pension liabilities underfunded on a grand scale."

After attacking the recent "fashion" of "German-bashing," Welteke admitted that the Bundesbank views the current domestic and international "confidence crisis" concerning the German economy as "highly serious." Due to record-high insolvencies, he said, the German banking sector is indeed in a "difficult position."

British Workers Face Mandatory Retirement, Pension Cuts

British workers will be forced to work five years longer, or face sharp pension cuts, the London Times reported April 18. "Millions of employees will be forced to work until they are 70, or face vastly reduced company pension payouts, under new proposals. The plans, to be published by the Government this summer, will impose a mandatory retirement age on Britain's workers for the first time," the Times said. The move "is likely to meet fierce opposition from workers and unions."

The government's plans to tackle the "growing pension-funding crisis" in Britain will be unveiled in a consultation paper from the Department of Trade and Industry. The background to this is obviously the devastation of corporate pension schemes following the three-year stock-market crash. The Times quoted a British pensions expert, Tom McPhail, saying: "These proposals will come as a shock to a lot of people who will see their pension substantially reduced if they want to retire at what they regard as the traditional pension age. Many people will be very upset by this, and will be forced to re-examine their expectations for retirement."

Indonesia Signals Move Out of Dollar; Will Asia Follow?

"Indonesia may dump dollar; rest of Asia too?" reads the headline of a feature on Bloomberg on April 17: "Pertamina, Indonesia's state oil company, dropped a bombshell recently. It's considering replacing the U.S. dollar with the euro in its oil and gas trades." While the international media barely took notice of the Indonesian move, due to the Iraq war and the SARS crisis, it "could have major implications for the world's biggest economy. Other Asian countries may not be far behind any move in Indonesia to dump the dollar. The reasons for this are economic and political, and they could trigger a realignment that undermines U.S. bond and stock markets over time."

The economic reasoning is rather obvious: After 12 rate cuts by the Fed, U.S. interest rates are at a 40-year low, and earnings on dollar assets are therefore very low. At the same time, the weak economy and the huge current account deficit, could send the U.S. dollar further down against other major currencies, even after an 18% drop against the euro over the last 12 months. However, there is more behind Asian moves to lower the dependency on the dollar: "Perhaps the biggest risk for the dollar, at least in the eyes of some analysts in Asia, is uncertainty surrounding U.S. foreign policy. Now that war in Iraq seems to be wrapping up, Asian markets are wondering if the U.S. will pursue regime change elsewhere.

"What if, for example, the U.S. began setting the stage for another preemptive attack in the Middle East or East Asia?"

On the morning of April 17, the U.S. dollar at one point plunged to $1.0972 to the euro, its weakest since March 13, coming very close to a new four-year-low.

Asian Airlines, Airports Collapsing Due to SARS Crisis

At Changi Airport in Singapore, the number of passengers passing through last month fell by 11.2% from March last year, and by 38.3% for the first week of April. Watching the airlines continue cutting flights across SARS-afflicted Asia, American investment bank Merrill Lynch likened the crisis to "watching a train crash." Flights are being cancelled at the rate of 19.7%. This far exceeds the 7% fall in flights at Changi in the aftermath of Sept. 11—and SARS "hot spots" Hong Kong and China are hit even worse. South Korea's Incheon International Airport reported a 36% drop in passengers on overseas flights in the first half of this month against the same period last year, Bloomberg News reported.

Hong Kong's No. 2 airline Dragonair said it would extend a 50% cut in its services into next month and cancel another two flights to China, and more in May. Vietnam's second airline, Pacific Airlines, announced suspension of its Hanoi-to-Danang service until May 15, after a 30% fall in bookings, AFP reported.

Cathay Pacific may ground its passenger fleet in May because of SARS.

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