India, Malaysia raise gas prices

Soaring cost of crude oil forces India to raise domestic fuel prices 11%; Malaysia, hit by massive subsidy bill, will raise gasoline prices by 40%.

NEW YORK (AP) -- Soaring oil costs are forcing India and Malaysia to raise fuel prices by reducing the subsidies they give to their residents.

Oil prices have doubled over the last year, spiking as high as $135.09 a barrel on the New York Mercantile Exchange on May 22 before falling back some. On Wednesday, the contract fell below $124 a barrel.

India imports nearly 75% of the crude oil it needs and it controls domestic prices of all fuel products, from gasoline to cooking oil.

But those price controls have caused state-owned oil companies to lose billions of dollars.

Petroleum Minister Murli Deora told reporters that gasoline prices will be raised raised 49 cents a gallon, and diesel prices 30.4 cents a gallon.

That's an 11% increase in New Delhi, the capital, where gasoline will be hiked to $4.56 a gallon. Fuel prices vary between states, which also impose their own taxes.

Cooking gas will be hiked to $1.25, per 30.8 pound cylinder. The increases go into effect at midnight Wednesday.

To help state-run oil companies, the government was also cutting the excise duty by 5% on gasoline, diesel and other petroleum products.

Communist parties, which are members of the ruling coalition, announced weeklong street protests across the country to force the government to take back its decision. They said in a joint statement that the government should further lower excise duties on petroleum products rather than raise prices.

Wednesday's price increase followed a similar move in February - but far from covers the gap with global market prices. Deora, the oil minister, told reporters that the moderate price increase was a compromise by officials "committed to protecting the interest of the common man as well as ensuring the financial health of the public-sector oil marketing companies."

The government is also mindful that an election must be held by the middle of next year, at the latest, and that price increases are unpopular.

"Are you happy or unhappy? People should compliment the government," Deora said, pointing out that the hike was far smaller than the recent runup in global oil prices.

At the current level of oil prices, Deora said India's state-owned oil companies were projected to collectively lose $58.4 billion this fiscal year through March 2009.

Malaysia said Wednesday it will raise gasoline prices by 40% to reduce the government's massive subsidy bill, a move that is expected lift the inflation rate to 5%.

The pump price of gasoline will rise on Thursday to $3.30 a gallon, from $2.32 a gallon now, Prime Minister Abdullah Ahmad Badawi told reporters.

"We cannot naturally keep subsidizing at the current rate," Abdullah said.

He said the government will also give a yearly cash rebate of $201 per year to owners of cars with an engine capacity of 2,000 cc or less to offset their burden from the massive hike. The money will be distributed to owners through post offices.

Subsidies have kept the price of fuel in Malaysia - a net exporter of oil - among the lowest in Southeast Asia. But the government says it can no longer afford to fund the subsidies, which are expected to cost the treasury more than $14 billion this year.

Abdullah said diesel prices will rise by $1.22 to $3.04 per gallon, a 67% increase.

Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad earlier indicated that further price increases were planned to bring fuel prices in line with global market cost.

"The long term plan is to increase it to market price," he said, suggesting gasoline prices could rise to $3.80 a gallon by August.

He said the move will save the government $1.29 billion a year. Shahrir said the hike in gasoline prices will likely increase the inflation to 5%.

Inflation hit a 15-month high of 3% in April, and was forecast at 2.5% to 35 for the full year before the new fuel prices were announced.

Fuel prices in Malaysia had been unchanged since February 2006, and economists have warned any move to abandon fuel subsidies completely may spark protests, push inflation sharply higher and weaken consumer spending - a bane to an already slowing economy.

The central bank has cut its 2008 economic growth forecast to 5% to 6%, from 6% to 6.5% previously.

But the government does not expect any protest or public anger, Shahrir said. "We are still giving a subsidy" to less wealthy people, he said.

Still economists were not convinced.

"This is quite a drastic measure," said Gundi Cahyadi, an economist with Singapore-based economic think-tank IDEAglobal. "In the long-run, it's good but the immediate impact will be negative. You can expect a slowdown in the economy to below 5.5% this year and probably into next year," he said.

He noted that Malaysia's gasoline price hike was the steepest in percentage terms among Asian countries such as Indonesia, Taiwan and India that have recently cut fuel subsidies.

It will relieve the government's financial burden over the long term but will also push up inflation and depress consumer spending and business investment, he said.

Cahyadi said the new fuel price is a "great risk" to Prime Minister Abdullah Ahmad Badawi, who is fighting for his political survival after his ruling coalition suffered election losses in March partly due to the rising cost of living. 

Service sector growth moderates

ISM index of non-manufacturing business shows expansion for second straight month, despite falling employment and rising prices.

NEW YORK (CNNMoney.com) -- A key survey of service sector executives released Wednesday showed business activity rose at a somewhat slower rate in May, even as employers cut payrolls and prices continued to rise.

The Institute for Supply Management's (ISM) non-manufacturing index fell to a reading of 51.7 from 52 in April. Economists were expecting a reading of 51, according to a consensus compiled by Briefing.com.

A reading above 50 indicates growth in the sector, and a reading below 50 represents a sector-wide decline.

"This report is consistent with the slow growth we're seeing in 2008," said Wachovia economist Sam Bullard.

May marks the first time the index declined - albeit very slightly - since its January facelift. Prior to January's report, the non-manufacturing index was only based on business activity, but it now equally measures business, orders, employment and supplier deliveries. The reading for business activity in the service sector rose to 53.6 in May from 50.9 in April.

The service sector encompasses the retail, transportation and health care sectors. It also includes sectors that have been hit hard by problems in the economy, including finance, real estate and construction.

The report also set off more alarms about the nation's labor markets, since it has been the service sector that has provided most of the job growth in recent years as factories closed or cut employment.

After some labor growth in April, the service sector employment index fell 2.1 points to 48.7 in May. The ISM employment index has now shown contraction in four of the past five months.

The report showed only 18% of service sector employers were adding staff, down from the 22% doing so in April. But just 14% of service-sector employers had cut staff in May, which is fewer than the 17% of employers that trimmed their payrolls in April.

"Everyone will be focused on the employment index number, but we're not seeing the kind of declines we'd see if we were in a recession," said Bullard. "Employers are still hesitant to lay people off, since productivity is up."

According to a Labor Department report released Wednesday, worker productivity increased at an annual rate of 2.6% in the first quarter, faster than the rate of 2.2% that the government initially estimated a month ago.

In another U.S. Department of Labor report, the government will announce May's unemployment report Friday, and it is expected to show that employers trimmed 60,000 jobs in the month. But with the cuts to service sector payrolls in Wednesday's ISM report, Bullard said the number of jobs lost could be even greater than anticipated.

"The labor market is continuing to moderate, but these numbers add to the downside risk for Friday's report."

Monday, the more closely watched ISM Manufacturing index came in at a 49.6 reading for April, showing the fourth-straight month of contraction in that sector. The manufacturing report also showed continued weakness in the job sector, as its employment index rose only 0.1 point from April, when the index fell to its lowest level since May 2003.

Meanwhile, the part of the service sector index that gauges prices paid by businesses in the service sector for materials and services rose for the 60th straight month to 77 in May from 72.1 in April. The prices index is now at its highest level since September 2005.

The number of business owners reporting higher prices rose to 65% from 60% in April. Only 1% of respondents said prices had fallen in the month. All 18 industries that the index covers reported an increase in prices, according to ISM.

"Members' comments in May reflect concern about business conditions, inclusive of rising costs, and the overall economy," said the ISM's service sector survey chair Anthony Nieves in a statement.

Still, the outlook for the service sector appeared positive. New orders grew for the third straight month, registering a reading of 53.6 on the index, up from 50.1 in April.

"With new orders popping up, service sector activity should at least hold these levels if not increase in the next few months," said Bullard.

Global economic outlook slashed

OECD foresees economic growth of only 1.8% in 2008, as global financial crisis takes its toll; sees U.S. growing 1.2%.

PARIS (AP) -- The Organization for Economic Cooperation and Development foresees several quarters of weak growth for most of its 30 members, which include the U.S., Japan, and several European countries, and cut its economic growth outlook through next year on Wednesday.

While the "odds have improved" that the financial crisis has passed its peak, the effects on growth are likely to linger, the OECD said.

The combination of financial market turmoil, sharply higher oil and commodity prices and cooling housing markets has made it more difficult for policy makers to gauge the correct response, the Paris-based think tank said.

Economic growth in the OECD's 30 members will slow to 1.8% this year and 1.7% next year, it said in its twice-yearly outlook. That compares with its previous forecast of 2.3% in 2008 and 2.4% in 2009.

Weak economic growth in the U.S. is dragging down the overall forecast. The U.S. economy will grow just 1.2% this year and 1.1% in 2009, the OECD predicted. Economic growth in the euro area and Japan will slow to 1.7% this year.

"OECD economies have been hit by strong gales over the recent past and it will take time and well judged policies to get back on course," said Jorgen Elmeskov, acting head of the OECD's economic department, in the report.

But the impact of the oil price shock combined with the market turmoil is "difficult to estimate." This, combined with weakening growth and inflation concerns, compounds "the risk of policy errors."

Central banks could err "in both directions," the OECD said.

Policy makers should be mindful of the stagflation seen in the 1970s and 1980s, when loosening interest rates fueled inflation. At the same time, overly tight monetary conditions could hurt major economies at a time when they need support.

In the U.S., the current "stance should be maintained until the recovery takes hold," the OECD said.

The Federal Reserve started aggressively cutting interest rates in September to keep the housing slump and a severe credit crisis from triggering a recession. Rates in late April were cut to 2%, a nearly four-year low.

Fed Chairman Ben Bernanke signaled Tuesday that interest-rate cuts are on hold for now, with the threat of inflation becoming more of a concern. Many economists believe the Fed will hold rates steady at its next meeting on June 24-25 and probably through much, if not all, of this year.

That scenario could change should inflation flare up.

The European Central Bank should "maintain interest rates at their current level" of 4% for the 15-nation euro region, the OECD said. The ECB has not moved rates since last June.

In Japan, weakening growth and deflation risks "argue for keeping monetary policy on hold."

However "large policy rate cuts are warranted in the United Kingdom and Canada" where the economies are "likely to experience sharper falls in output" than other OECD countries.

More generally, the OECD said signs that inflation expectations are drifting higher should call for caution.

Commodity prices are being driven upward by robust growth in non-OECD countries such as China and India. That cushions growth in the OECD, but also creates inflationary pressure.

Soaring oil costs forced India to raise fuel prices for the second time this year, a top official said Wednesday. 

The dollar's short-lived comeback

The greenback has rebounded nicely from lows hit in April. But some currency experts don't expect it to last.

NEW YORK (CNNMoney.com) -- The sick dollar may be getting a little healthier -- but it is far from making a full recovery.

After slipping to record lows against the euro in April, the greenback has recovered in recent weeks, helped in part by expectations that the Federal Reserve's aggressive rate-cutting campaign may have reached a stopping point.

But with the U.S. economy under strain, resistance by foreign central banks to cut interest rates and a massive U.S. trade deficit, a number of currency experts are betting the dollar will stay under pressure at least through the remainder of the year.

"The recent strength we've been seeing is not a turn in the dollar so to speak," said Phyllis Papadavid, a senior currency strategist at Societe Generale in London, adding that the dollar's recent bounce will be short lived because of economic concerns.

To that end, the latest reading on manufacturing activity fell more sharply than expected in April, while retail sales, which drive two thirds of economic activity in the United States, also suffered a decline last month.

At the same time, there has been further fallout in the housing market and unemployment is on the rise.

Even though the weakened dollar has helped boost the nation's exports by making goods manufactured in the United States more attractive to foreign buyers, the nation's current account deficit - which measures trade with the rest of the world - is still massive.

The deficit was a whopping $738.6 billion at the end of last year. While that's down from $811.5 billion in 2006, it's still large enough to be a concern since the current account deficit has to be covered by borrowing from overseas investors.

If these investors pull their money from the U.S., that could result in a cycle of falling stock and bond prices and ultimately a further decline in the value of the dollar.

In addition, foreign central bankers have been reluctant to cut interest rates, which has also helped spur the dollar's weakness. Both the European Central Bank and the Bank of England held interest rates steady last week.

Still, it is understandable why a growing number of experts are betting on a dollar rebound.

Foreign investors, for example, are buying more U.S. securities than they are selling, which help supports the dollar.

According to the most recent Treasury International Capital report, a monthly reading which measures foreign investment flows, net foreign purchases of long-term U.S. securities were $80.4 billion in March, up from net purchases of $64.9 billion in February and $56.7 billion in January.

At the same time, futures markets suggest that if the Fed takes any action in the coming months, it will be a rate hike to keep inflation in check, which would also boost the greenback.

Right now, investors are pricing in a scenario in which the central bank leaves interest rates unchanged at 2% during the summer, and a better than 50-50 chance it will raise rates by a quarter of a percentage point when policymakers rendezvous at the end of October.

What's more, most eligible Americans still have not received their economic stimulus check, which could provide a much-needed shot in the arm to both the U.S. economy and the dollar.

But others say it's uncertain whether the economic stimulus checks will be enough to heal the U.S. economy.

"We don't know if the stimulus checks will be a Band-Aid that will help the U.S. economy recover," said David Watt, a senior currency strategist at RBC Capital in Toronto. "Until we are clear about that, the U.S. dollar will struggle."

Plus, foreign investors are a fickle bunch, and the difference between U.S. interest rates and other foreign central banks makes the dollar less attractive.

"At the end of the day, yields in the U.S. are far below yields [of other central banks]," said Daniel Katzive, a foreign exchange strategist at Credit Suisse.

So it is highly unlikely that the dollar will return to the levels it was at just a year ago, when $1 was worth 1.35 euros or 120 Japanese yen.

In order for the dollar to get back to those levels, experts say the U.S. trade deficit would have to drastically shrink and the Fed would need to aggressively raise interest rates to combat inflation.

"It's probably going to be late 2009 before we get a real strong sustained bounce in the dollar," said Katzive. 

World economy on thin ice - U.N.

The United Nations blames the globe's dire situation on the decline of the U.S. housing and financial sectors.

That's down from a global growth rate of 3.8 percent in 2007.

The U.N.'s mid-year economic projections released Thursday blamed the downturn on further deterioration in the U.S. housing and financial sectors in the first quarter.

The U.N. said the U.S. problems are expected to continue to be "a major drag for the world economy" into 2009. It forecast global economic growth of 2.1 percent next year.

But developing countries won't suffer as badly. The U.N. said they should reach 5 percent growth this year, compared to a robust 7.3 percent in 2007. 

Prospects of cheaper loans hit as inflation forecast sends Libor soaring

OECD warning of sharper slowdown