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US exports economic weakness

25-Mar-2008
  • FedEx states rising fuel costs and weak US economy may weigh on company’s earnings well into next fiscal year;
  • Latest leading economic indices in the US point to increasing risks for economic weakness in the short term;
  • OECD expects US economy to grind to a halt in 1H08;
  • Japan and Europe to witness a slowdown in growth – OECD;
  • Germany’s economic picture “clouding over” – The Conference Board;
  • Shanghai Composite Index falls sharply, taking March index losses to 17%;
  • Chinese policy makers tackling inflation and potential slowing of exports to key trading partners.

The downturn in the US looks increasingly to be spreading to other key economies, including Europe and Japan, which could have a knock-on impact for China.

FedEx has revealed that rising fuel costs and a weak US economy, which damaged the latest quarterly profit, may weigh on the company’s earnings well into its next fiscal year. CEO, Fred Smith, stated, “FedEx faces a challenging economic environment that includes persistently high oil prices, sluggish US growth and continued concerns in the credit markets”. The carrier’s CFO stated that looking ahead to its next fiscal year, “we are expecting a continuation of fourth-quarter trends, which would result in limited earnings growth next year”. The carrier is “scrutinising all expenses and investments” to realign them with the current environment.

Earlier this month, FedEx's main rival, UPS, warned that falling demand for domestic package deliveries, which had set in by Feb-08, may leave the company short of its quarterly profit forecast.

Despite better than expected housing market data from the US overnight for Feb-08, the latest leading economic indices in the US point to increasing risks for economic weakness in the short term, while the OECD is expecting the US economy to grind to a halt in the first half of this year.

The OECD also predicts Japan and Europe to witness a slowdown in growth, with Japan’s GDP growth rate to slow from an anemic 0.3% in 1Q08 to 0.2% in 2Q08. The economic picture in Germany is “clouding over”, with big falls in its leading economic index suggesting the end to the past year's strong gains in industrial production and employment.

Meanwhile, the all-important Chinese economy is experiencing some jitters. Another sharp sell-off on the Shanghai Composite Index yesterday has taken the key Mainland market index down 17% so far this month. China has a domestic inflation issue to deal with and if the economies of its key trading partners (US, Europe, and Japan) all slow down, China’s exports will come under pressure. There are some challenging times ahead for the Chinese policy makers.


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