ECONOMICS - THE WEEK IN VIEW

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The Independent Online
US economic reports this week are expected to show gains in manufacturing, factory orders and employment in March, which could prompt a second rate rise after last week's quarter percentage point hike to choke off economic growth and inflation. The next move could be as early as the Federal Reserve policy meeting on 20 May.

"I'm in the camp where I see more tightening moves ahead," said Eric Cheung, bond manager at Wilmington Trust.

The most closely watched report will be Friday's non-farm payrolls and hourly earnings. Analysts expect March payrolls to have risen by fewer than 200,000, below the 250,000 monthly average of the last five months. Wage growth, however, could show a relatively large gain of 0.5 per cent, reflecting the ever-tightening labour market. Such tight labour markets traditionally lead to inflation because, eventually, employers must bid up wages to attract scarce workers.

The momentum of economic growth seen in the fourth quarter of last year has continued in the first quarter, buoyed by factory activity, retail sales and job growth. By most analysts' reckoning, the US economy grew at about 3 per cent in the first three months of the year, though growth should slow towards 2 per cent by the end of the year.

So far price pressures have failed to spark. However, the spectre of inflation prompted the Fed to act pre-emptively last week. The Fed called its decision "a prudent step that affords greater assurance of prolonging the current economic expansion", now in its seventh year.

It was the first rate increase since January last year, even though the economy put in a stronger than expected performance during two of 1996's four quarters. Still, consumer prices increased only 2.6 per cent last year.

Central bankers said last summer they expected the economy to slow on its own, but six months later the unemployment rate continues to flirt with an eight-year low of 5 per cent.

In Germany, economists' forecasts for the second quarter are optimistic for a rebound in growth. Thanks to robust foreign demand, the economy is seen expanding 0.8 per cent on the quarter and by 2 per cent from a year ago, while inflation will remain capped by sluggish domestic sentiment.

"It's the export sector that's going to do it for Germany again," said Alison Cottrell, economist at Painewebber International. "But it's going to be a while before consumers prefer to spend rather than save."

Factories are reporting increased order inflow, business confidence is more upbeat and a weaker mark is brightening the outlook for exporters. Copyright: IOS & Bloomberg

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