bizzXceleration: Performance, Value and Profit

Global Outlook

World Bank Cuts Global Economic Growth Forecasts, Citing Oil, Food Prices Global economic growth will probably slow to 2.7 percent this year from 3.7 percent in 2007, checked by spiraling food and energy prices and the subprime credit crisis, the World Bank said. Developing countries should be less affected, with their economies expanding on average 6.5 percent, down from 7.8 percent, the Washington-based lender said today in its Global Development Finance report released in Cape Town, South Africa. ``The slowdown in high-income countries has become more apparent since the end of 2007,'' the bank said. ``The continued strength of domestic demand and imports in developing countries is helping to cushion the global effects of the slowdown in high- income countries.'' In January, the World Bank forecast global growth of 3.3 percent for this year, while the International Monetary Fund in April predicted 3.7 percent. The growth outlook has deteriorated as record oil and food prices stoke inflation and trim output. Oil traded in New York jumped to a record $139.12 on June 6.

Asian Economic Miracle Is at Risk All Over Again Depending on whom you ask, China is either on the verge of a big slowdown or an inflation surge. Some worry Asia's second-biggest economy faces both risks. China's situation suggests Asia is on the cusp of its worst couple of years since 1997. From Seoul to Jakarta and from Beijing to New Delhi, officials are grappling with a rapidly worsening inflation picture. It would be nice if there was less concern about the phenomenon and more action to address it. Asia may be nearing the point of no return -- one where the region's so-called economic miracle goes off the rails anew. Asia isn't about to revisit the darkest days of 1997 and 1998. It was then that speculators tested central banks' resolve to defend currencies. Thailand's devaluation in July 1997 set in motion a crisis that suspended the Asian miracle. It prompted investors to leave Asia and sent contagion around the globe. A decade later, Asia faces the flipside of that experience. The turmoil of the 1990s was about deflation and recession; the situation today involves overheating. Central banks may already be remiss in a different way than they were during the last crisis: They are falling behind the inflation curve. Bottom line: Interest rates need to go higher in many economies. With household expenses rising, Asia may very well overheat unless central bankers do their jobs. The longer they delay, the bigger the costs to long-term prosperity and the bigger the risks of disappointing investors. Asia has thus far withstood the U.S. credit-market debacle remarkably well. If that was the only threat in the global financial system, 2008 might have been a much better year for the region. Oil at more than $135 a barrel and record food prices have conspired to restrain growth and worsen inflation.

Free-Trade Era May Be Near End as Job, Food, Growth Concerns Fuel Backlash After six decades of ever-expanding international commerce, the high tide of free trade is ebbing. As tens of thousands of South Koreans protest U.S. beef imports, rising commodity prices push nations to keep more food for domestic consumption and the U.S. chooses a new president who might be less supportive of free trade than his immediate predecessors, the world may be facing the end of a cycle that began in the immediate aftermath of World War II. Fueling the backlash is a convergence of trade-related anxieties: national-security concerns, worries about food safety and sufficiency, the desire to protect local jobs and the environment. In addition, the benefits of trade are often widely dispersed -- think low prices at Wal-Mart -- and entail high adjustment costs, including the loss of manufacturing jobs. Reservations about a new WTO agreement have grown into a general aversion to free trade in many countries, including France and Italy, where cheap imports are blamed for job losses. That's causing some governments to rethink their pro- trade policies. Most important is the U.S., the world's largest economy and biggest importer. Democrats, who took control of Congress in 2007, have postponed a decision on a trade deal with Colombia by amending so-called fast-track authority, which guards against amendments and filibusters and requires a timely vote.

Inflation

Inflation's Bite Worsens Around World Inflation worries are heating up around the world and jolting financial markets in the process. Inflation worries are heating up around the world and jolting financial markets in the process. On Tuesday, China's stock market was the latest to feel the blow, with the benchmark Shanghai Composite Index tumbling by 7.7%, to its lowest close this year. The drop came after the government announced steps to remove cash from the financial system in an attempt to tamp down inflation. A year ago, in a group of 24 large developing nations tracked by Bank of America, about three-quarters were either meeting or staying below their inflation targets. Today none of them are. Skyrocketing energy and food prices are particularly acute for countries with large numbers of people living in poverty. But there are other inflationary forces at work which preceded the recent surge in commodity prices. Many developing economies have experienced a flood of capital inflows, leading to an overheated investment climate and piles of reserves. They've also seen rapid growth in domestic demand and lending, plus tightening labor markets. The inflation spike is sparking concern among investors. After years of benign conditions, emerging markets "actually are getting riskier,"… Central banks across the developing world face a critical test. Many haven't taken aggressive steps to tighten monetary policy, say economists and investors, and have resorted to temporary measures like price controls on consumer goods such as flour and gasoline to tame inflation. Governments seeking to dial back costly subsidies risk angering their populaces. Investors are punishing stocks, bonds, and currencies in other countries that are already experiencing runaway inflation -- or where rising prices combine with other economic vulnerabilities. Inflation menace threatens Asia decoupling story,Double-digit inflation? 

Inflation from Asia: The next crisis Rapidly rising prices across the continent are the biggest danger for the global economy right now. And things could get much worse in the coming months. Inflation is out of control. Even by wildly understated official measures, prices are climbing at two -- or more -- times government targets. And with central banks printing money and flooding the financial markets with cash, inflation is going to get a whole lot worse before it gets better. In the United States? No. At least not yet. Look to Asia if you want to see runaway inflation now. In China and India, inflation looks like it's headed for double digits. Even with the financial crisis that started in the subprime-mortgage market still far from over, I'd rate runaway inflation in Asia as the greatest danger to the global economy. Moderately slowing growth in Asian economies as a result of higher interest rates imposed to fight inflation wouldn't be good for a global economy already burdened by slow growth in the United States. In this scenario, Asian stock markets would continue to sell off as investors reacted to the prospects of slower growth. But I still think that's better than the alternative. If these countries ignore their inflation problems until inflation has built up even more momentum, they will face solutions that resemble the very strong medicine Vietnam is about to swallow. That would cause a much bigger drop in global trade and global demand, as well as much bigger drops in regional and global stock markets. It also would increase the odds that one of these countries could get in so much trouble that global stock markets would go into panic mode.

Threat to growth and stability India, China and Turkey hit hardest by rising prices. Brazil tops short list of nations that have had success in containing costs. High inflation, and in some cases hyperinflation, battered emerging markets in Latin America, Eastern Europe and Asia in the 1990s. Since then, inflation has been steadily declining until a few months ago, when energy and food prices started breaking record, pushing inflation higher and higher in the developing world. Food makes up a much bigger part of the inflation basket, and disposable-income spending in emerging markets than it does in developed countries. For example, food accounts for more than 30% in Argentina, Malaysia, Russia, China, India and the Philippines. The other major contributor to inflation is the price of energy. The industrialization of fast-growing emerging markets requires tremendous amounts of energy resources, such as oil, natural gas and coal. Another cause of inflation "is that a period of relatively loose interest rates in the developed world has resulted in a weak U.S. dollar," said Nicholas Field, London-based fund manager for global emerging market equities at Schroder Investment Management. Weakness in the dollar has boosted the price of dollar-denominated commodities like oil. Most vulnerable to an inflation hit are major food and fuel importers, such as China and India, strategists said. China's consumer-price index, a key measure of inflation, hit 7.7% in May, down slightly from 8.5% in April, but still fairly high.

Oil/Energy

Why oil prices will tank But if you stick to basic economics, it's clear that the only question is when - not if - prices will succumb. The oil bulls are correct in their explanations of why prices have jumped, to a record $138.54 a barrel on Friday. It's indisputable that worldwide demand has surged, chiefly driven by strong growth in China, India and the Middle East. It's also true that most of the world's reserves are controlled by governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth.But rather than forming a permanent new plateau for prices - as the bulls contend - those forces are causing a classically unstable market that's destined for a steep fall.In a normal oil market, the cost of producing the last, most expensive barrel of oil needed to satisfy worldwide demand sets the price for every barrel the world over. Other auction commodity markets work much the same way.So even if Saudi Arabia produces at $4 a barrel, if the final, multi-millionth barrel required to heat houses and run cars costs $50, and is produced, for argument's sake, at a flagging field in West Texas, the world price is $50. That's what economists call the equilibrium price: It's where the price that customers are willing to pay meets the production cost, including a cushion, naturally, for profit or "the cost of capital." But today, the sudden surge in demand and the production bottlenecks have thrown the market radically out of balance. Watchdog cuts oil demand outlook

• Oil Industry I (Readings): Prices, Fundamentals, and Big Oil Futures
• Oil Industry II(Analysis): LT Supply-Demand, Outlook and Disruptions

 Plenty in the tank The problem seems to be getting to enough of the oil that is known to exist.  “WE’RE not running out of hydrocarbons,” insists Tony Hayward, the boss of BP, one of the world’s biggest listed oil firms. Enough oil has already been discovered around the world, Mr Hayward says, to maintain consumption at current levels for another 42 years. As he recently put it, humanity has guzzled through 1 trillion barrels, but has its next trillion already lined up, and could probably unearth a third trillion if it really applied itself. Why then, are oil prices hovering over $130 a barrel? Mr Hayward blames poor policy-making or, in his florid phrase, “the madness of men”. Some 80% of the world’s oil reserves, he says, are in the hands of state-owned oil firms, which tend to allow firms like his only limited access. He believes that if these riches were fully exploited, the world could easily produce 100m barrels a day (b/d) or more. That’s a big increase on last year’s figure of 82m b/d, and a level that other oilmen, such as the boss of Total, another big Western firm, think impossible. At first glance, BP’s own data seem to support the gloomier case. The firm reckons that global output fell by 130,000-odd b/d last year. Worse, proven reserves also fell, by about 1.6 billion barrels. This suggests that the world is consuming oil faster than it can be found—a worrying thought, even if reserves are large.

Development Challenges

India's Future Rides on 76-Year-Old `Metro Man' Elattuvalapil Sreedharan, popularly known as India's ``Metro Man,'' is the managing director of Delhi Metro Rail Corp., which operates the newly built world-class subway that's transforming the economy of India's capital, New Delhi. It's also improving the city's air quality, altering its social life and even influencing norms of individual behavior. Funded by government equity and debt and a soft loan from the Japan Bank for International Cooperation, a $2.3 billion, 65- kilometer (40-mile) section of the project was completed in 2005, three years ahead of schedule. Not just that: The stations are clean and spacious; littering is almost non-existent; people wait their turn at the metal detectors; the trains are comfortably air-conditioned even during peak office hours; the waiting time is short; and trains are punctual 99.9 percent of the time. Delhi Metro has been such a hit that real-estate values have already risen along the planned routes for the second phase of the project in which an additional 121 kilometers of tracks are being laid at a cost of $4.3 billion. There's so much of Sreedharan in the success of Delhi Metro that one wonders if India will be able to replicate it elsewhere, especially in projects run by the government, which doesn't attract top talent anymore. Letting the private sector take the lead seems to be the only realistic option for India to ease its acute shortage of infrastructure -- roads, ports and power stations -- even though it may ultimately be a costlier option for the taxpayer and the consumer. If only India had 100 more public servants of the caliber of its Metro Man.

Crude tactics BP’s boss, Tony Hayward, tries to unravel the curious goings-on at TNK-BP in Russia. WHEN your Moscow office is raided by Russia's security services, a court in Siberia imposes an injunction on your staff and your work permits are denied, you can tell you have upset someone. But who, and how? That is what BP, a British oil firm which owns 50% of TNK-BP, a joint venture with a Russian firm, has been trying to find out. So what is behind the hostility? People close to BP say the Russian oligarchs are up to their old tricks again, and are trying to exploit Russia's weak institutions and take control. Russian business practices can be (and often are) shockingly crude. But the Russian shareholders claim to have a genuine grievance. They say BP treats TNK-BP as a subsidiary, rather than an independent company run for the benefit of all shareholders. They say BP cares more about its oil reserves than costs or profits. TNK-BP provides 40% of BP's replacement reserves and 25% of its oil production. The Russians would like TNK-BP to expand abroad, but that would turn it into a rival to BP. In any other country this would have been an ordinary shareholder dispute, but in Russia, politics always get in the way.

Argentina Loses Investors at Fastest Pace Since 2000 on Economy, Protests Argentina's stock market is losing foreign investors at the fastest pace since 2000 on concern accelerating inflation and a three-month farmers strike will curb economic growth and corporate profits. About 1,000 emerging-market funds sold $157 million in Argentine stocks through May, according to fund flow tracker EPFR Global in Cambridge, Massachusetts. That's more than the $118 million average daily trading on the Buenos Aires stock exchange and the biggest outflow since 2000, the year before the government's $95 billion debt default. Argentina's Merval index lost 4.7 percent over the past year, compared with a 27 percent rise for the Bovespa index in Brazil. WestLB Mellon Asset Management's Bill Rudman sold Telecom Argentina SA, the country's second-biggest telephone company, as he cut Argentine holdings last month to 0.5 percent of the total $3 billion of emerging-market equity he manages, from 2 percent. The agricultural protests over higher export taxes, food shortages and street demonstrations are holding back investment. ``We felt particularly the farmers strike and friction in the country was accelerating what might be the next crisis,'' said Rudman, the Latin America manager at WestLB Mellon in London. ``Argentina risks being ignored by investors, becoming just a residual within the emerging markets.''