Japan's Economy Grew 4% in Q1

Japan's first-quarter economic growth was faster than the government initially reported after figures showed businesses spent more than estimated.

Gross domestic product expanded an annualized 4 percent in the three months ended March 31, the Cabinet Office said today in Tokyo, quicker than the 3.3 percent estimated last month. The median estimate of 22 economists surveyed by Bloomberg News was for 3.8 percent growth.

Figures since the first quarter suggest growth has slowed as rising oil and raw materials costs erode profits. Japan's soaring import bill caused the current account to narrow more than economists estimated in April and producer prices to climb at the fastest pace in 27 years in May, reports showed today.

"The economy's going to have problems from now on,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. "Japan will teeter on the verge of a recession this year because of the rise in oil and material costs along with the U.S. slowdown.''

The yen traded at 107.32 per dollar as of 9:17 a.m. in Tokyo compared with 107.42 before the reports were published.

Japan expanded 1 percent from the fourth quarter, today's figures showed, more than the 0.8 percent reported last month.

Business Spending

Business spending increased 0.2 percent, compared with a 0.9 percent decline initially estimated, reflecting figures published by the Finance Ministry last week that showed companies increased capital spending by 1.3 percent in the quarter. The ministry's report accounts for about 60 percent of the business investment component of revised GDP.

The same survey showed corporate profits fell 17.5 percent from a year earlier, the steepest decline since the most recent recession in 2001. Reports for April showed household spending fell the most in 19 months, factory production dropped and unemployment climbed.

"The economy may already be in a downturn,'' said Kenichi Kawasaki, an economist at Lehman Brothers Inc. in Tokyo. "Falling profits are likely to stifle corporate appetite for capital spending. Exports are likely to start softening.''

The Cabinet Office this week said the world's second- largest economy has probably peaked, and companies including Advantest Corp. and Nissan Motor Co. expect conditions to worsen. The risk of a shrinking economy will keep the Bank of Japan from raising its key interest rate from 0.5 percent until next year, according to economists surveyed.

Advantest, Nissan

Advantest, the world's biggest maker of memory-chip testers, may report lower earnings this fiscal year as chipmakers scale back investment in factories. "Our business is very slow,'' President Toshio Maruyama said last week.

Nissan, Japan's third-largest carmaker, last month forecast the biggest drop in profit in nine years because of a stronger yen and weaker demand in the U.S., its most profitable market.

"Take a look at all the headwinds we're facing in 2008,'' Nissan's Chief Executive Officer Carlos Ghosn said last week. "We're not being pessimistic, we're being prudent.''

All eight Japanese passenger carmakers have said operating profit will fall this fiscal year.

Sales to Asia and commodity-exporting regions such as the Middle East have been keeping the economy afloat as the U.S. slows. Exports, the main driver of Japan's growth in the past three quarters, have expanded each month since November 2003.

"Japan is obviously at risk of a lagged impact from the U.S. hitting Europe and Asia a bit more,'' said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. ``If that happens you'll get slower growth in the second half of the year, but you'll still get trend growth overall.''

Japan's economy has grown an average of about 2 percent in each year of the current expansion, which began in February 2002.

India's Inflation Jumps to 8.24%; Fastest Since 2004

India's inflation jumped to 8.24 percent, the fastest since August 2004, adding pressure on the central bank to raise interest rates.

Wholesale-price gains accelerated for a seventh straight week through May 24, after increasing 8.1 percent in the previous week, the commerce ministry said in a statement in New Delhi today. Analysts had forecast inflation at 8.29 percent.

Lehman Brothers Holdings, Standard Chartered Bank and ICICI Securities Ltd. expect the inflation rate to rise to a 13-year high of 9.5 percent after the government increased fuel costs this week. Prices are rising amid slowing economic growth, making it harder for central bank governor Yaga Venugopal Reddy to decide whether to increase borrowing costs.

"While the central bank has shown reluctance to touch policy rates, this may change soon,'' said Prasanna Ananthasubramaniam, a Mumbai-based fixed-income analyst at ICICI Securities, a unit of India's biggest bank by market value. "The bank will be worried about worsening inflation expectations on the back of this week's fuel price hikes.''

Reddy said yesterday that prospects of more food output this year and curbs on farm exports will boost supplies and help tame inflation, playing down chances of higher interest rates.

Still, India's benchmark 10-year bond yield was unchanged at 8.23 percent, the highest in a year, after the inflation data. Inflation was mainly driven by higher costs of fuel, power and light, basic metals including steel and food grains in the week ended May 24.

Fuel Prices

India, which imports 70 percent of its oil, increased prices for gasoline by 11 percent, diesel by 9 percent and cooking gas by 17 percent after oil reached a record $135.09 a barrel in New York on May 22. India previously raised fuel prices in February, the first time since June 2006.

The changes in fuel prices announced on June 4 will be reflected in the inflation data due for release on June 20. The commerce ministry today raised its inflation estimate for the week ended March 29 to 7.75 percent from 7.41 percent.

Reddy, who has kept the benchmark interest rate unchanged at a six-year high of 7.75 percent since March 2007 and relied on forcing lenders to set aside more reserves to check consumer demand, said yesterday the central bank is ready to use its full range of instruments to curb inflation.

Reddy said the outlook for India's sugar production appeared bright and that for wheat output was positive.

To boost agriculture supplies, the government has scrapped import duties on edible oils and banned the export of pulses and rice in the past six months.

India's food grain production may increase to a record 227.3 million tons in the year ending June, helped by bumper rice, wheat and lentils output, the agriculture ministry said in April. It may receive an additional boost as rainfall in the four-month monsoon season that started last week is forecast to be adequate.

India's economy, Asia's third-largest, expanded 9 percent in the year ended March 31, the weakest pace in three years.

Europe's Expansion Accelerates More Than Estimated

European economic growth accelerated more than initially estimated in the first quarter as investment and construction spending in Germany helped the region weather record oil prices, the euro's gains and market turmoil.

Gross domestic product in the 15 countries that use the euro increased 0.8 percent from the fourth quarter, compared with an earlier estimate of 0.7 percent, the European Union's statistics office in Luxembourg said today. Investment jumped 1.6 percent in the first three months of this year, the most since the second quarter of 2006.

Both the German and European economies are set to slow in the current quarter as oil prices boost costs for consumers and companies and the euro's advance makes exports less competitive. The slowdown, signaled by declining measures for manufacturing and services activity and consumer confidence, may not be as sharp as in the U.S., reinforcing the European Central Bank's case for holding off lowering interest rates as it tries to tame inflation.

"When it comes to growth, the past has shown that the ECB a clear preference for hard numbers,'' said Carsten Brzeski, an economist at ING Group in Belgium. "Confidence indicators have not plunged enough to justify a rate cut at the current juncture. The ECB has still time and room to focus on high inflation.''

The euro rose 0.3 percent to $1.5589 as of 12:12 p.m. in Brussels. The currency has risen 16 percent against the dollar in the last 12 months and reached an all-time high above $1.60 in April. The Dow Jones Stoxx 600 gained 0.1 percent to 318.72 and the Stoxx 50 index was little changed.

First Quarter

From a year earlier, the economy expanded 2.2 percent in the first quarter. Fourth-quarter growth was revised down to 0.3 percent from 0.4 percent compared with the prior three months.

Exports rose 1.9 percent and government spending increased 0.4 percent from the prior quarter, the statistics office said in today's report, the first detailed look at the first-quarter GDP data. Consumer spending gained 0.2 percent after contracting 0.1 percent in the previous three months.

In the first quarter, Germany's economy expanded at the fastest pace in 12 years as construction spending jumped 4.5 percent. German builders benefited from an exceptionally mild winter, according to the German weather service, while orders from Asia boosted sales.

Hochtief, Volkswagen

Hochtief AG, Germany's largest construction company, last month said first-quarter profit more than tripled on mining projects in Asia and construction in the Middle East and Australia. Sales at Volkswagen AG rose almost 8 percent in the four months through April as growth in China and Brazil offset a decline in North America.

"The first quarter was an outlier and shouldn't be read as where the economy is going,'' said Michael Hume, chief European economist at Lehman Brothers International in London. He forecast that the German economy will shrink in the current quarter due partly to a fading construction effect. The euro area as a whole may record zero growth this quarter, he said before today's report was published.

Data since the end of the first quarter have signaled growth across Europe is slowing. Retail sales in Germany unexpectedly dropped for a second month in April as faster inflation left consumers with less purchasing power, while unemployment rose for the first time in more than two years. In France, business confidence declined to the weakest in more than two years last month as rising energy prices and the euro's advance hurt the outlook for corporate profits.

Ifo Index

Other data suggest a more benign outlook. Germany's Ifo index of business sentiment rose in May, while European retail sales rose for the first time in three months, according to a survey of more than 1,000 executives by NTC Economics Ltd.

Still, adding to pressure on Europe's companies and households is easing demand in the U.S. amid the fallout from the housing slump there, which pushed up credit costs worldwide. ECB council member Nout Wellink said yesterday the euro-area economy hasn't felt the full effect yet of the U.S. slowdown and this will become visible with a certain time lag.

While economic growth is cooling, the ECB is focused on price stability. That job has become more difficult in the last 12 months as food and oil prices soar. Crude oil rose to a record $135.09 a barrel on May 22 and consumer-price inflation accelerated to 3.6 percent last month, the fastest pace since the ECB's inception 10 years ago.

Timely Reminder

"The present price hikes are a timely reminder that, when it comes to inflation, complacency is out of place,'' ECB council member Axel Weber said on May 30 "We cannot rest on our laurels where credibility is concerned.''

Producer-price inflation accelerated to 6.1 percent in April, the most in more than seven years, from 5.8 percent in March, according to separate figures published today.

ECB policy makers hold their next rate-setting meeting in two days, when the central bank will publish new staff forecasts on inflation and growth. The ECB will probably hold its key rate at 4 percent this week and leave it there until at until at least February, according to economists surveyed by Bloomberg.

"The ECB's response will be to tolerate slower growth and leave rates unchanged for a while,'' said Silvia Pepino, an economist at JPMorgan Chase & Co. in London. "That said, the central bank's rhetoric is likely to be tough on inflation, leaning towards a tightening bias.''

Swiss Inflation Rate Rises to 15-Year High on Oil

Swiss inflation accelerated more than economists forecast to the fastest pace in almost 15 years in May, led by rising energy costs.

Swiss consumer prices rose 2.9 percent from a year earlier after increasing 2.3 percent in April, the Federal Statistics Office in Neuchatel said today. That's the highest rate since October 1993. Economists forecast inflation of 2.4 percent, according to the median of 19 estimates in a Bloomberg survey.

A surge in oil prices to a record $135.09 a barrel on May 22 is pushing up inflation and draining consumers' purchasing power just as economic growth cools. Central bank President Jean-Pierre Roth said May 23 that inflation could pose a real problem if it becomes entrenched in the economy.

"We're already working on revising up our inflation forecast for this year,'' said Patrick Muhl, a senior economist at Credit Suisse Group AG in Zurich. "We still expect the Swiss National Bank to keep interest rates on hold, but there are increasing risks that they'll raise the benchmark further.''

Crude oil prices have gained 33 percent this year, adding to pressure on companies to pass on higher costs to shore up earnings. Ciba Specialty Chemicals AG, the maker of Ferrari red car-paint pigment, cut its annual earnings forecast in April partly because of rising raw-material costs.

Franc Gain

From April, consumer prices increased 0.8 percent, the largest month-on-month gain since October 2007. Heating oil prices rose 58 percent from a year earlier and gasoline was 7.5 percent more expensive. Diesel prices rose 21 percent from May 2007. The cost of beef increased 5.5 percent.

Excluding prices of food, beverages, seasonal goods, energy and fuel, consumer prices rose 0.3 percent in the month and 1.4 percent from a year earlier, the statistics office said.

The Swiss franc gained against the euro after the inflation report, rising to 1.6068 from 1.6119 yesterday.

The currency's 8.9 percent gain against the dollar this year has helped shield the economy from surging energy costs by taking the sting out of higher import prices. Against the euro, the franc has appreciated 2.8 percent since January.

Foreign Pressure

Still, the increase in Swiss consumer prices is due more to foreign than domestic pressures. Imported goods were 1.8 percent more expensive than in April and cost 6 percent more than in May last year, today's report showed. Prices of Swiss-made products rose 0.4 percent from April and 1.6 percent in the year.

The Zurich-based SNB aims to keep annual gains in consumer prices just below 2 percent. Its next meeting to decide interest rates is on June 19.

At its last meeting in March, the SNB left its key rate at a six-year high of 2.75 percent and forecast inflation will average about 2 percent this year. Roth said last month the bank faces the challenges of bolstering growth and containing inflation. Vice President Philipp Hildebrand said May 22 that the room to maneuver with respect to interest rates has decreased.

"Concerns about higher inflation have emerged as the main worry for the Swiss National Bank,'' Allan Monks, an economist at JPMorgan Chase & Co. in London, said before today's report.

With the economy losing momentum, companies may find it more difficult to pass on higher costs. Swiss leading economic indicators declined to the lowest in five years in May and manufacturing slowed for a third month.

Investors have already raised expectations of the SNB raising borrowing costs this year, futures trading shows. The implied rate on the three-month Liffe contract expiring in December traded at 3.03 percent today, up from 2.87 percent on May 1.

Thai Inflation Quickens to Fastest Pace in a Decade

Thailand's inflation rate was the highest in close to a decade in May amid record oil prices. A slowing economy and anti-government protests may keep the central bank from raising interest rates until later this year.

Consumer prices gained 7.6 percent last month from a year earlier, the Commerce Ministry said today in Bangkok. The pace was the highest since August 1998 and exceeded all 16 economists' estimates in a Bloomberg News survey.

Surging oil prices are slowing growth in the $206 billion economy, Finance Minister Surapong Suebwonglee said May 28. Thai Prime Minister Samak Sundaravej yesterday backed down from a threat to forcibly disband street protests in Bangkok. Record fuel costs are fanning inflation across Asia. Indonesia today said consumer prices rose the most in 20 months in May.

"The inflation risk has intensified but the central bank may need to tolerate this for a while as local demand remains fragile,'' said Thanomsri Fongarunrung, an economist at Phatra Securities in Bangkok. "Raising the rate now may backfire.''

The Bank of Thailand has held its one-day bond repurchase rate at 3.25 percent since August. Policy makers, who said May 21 they are ready to adjust monetary policy should inflation accelerate, next meet on July 16.

Protests

Higher interest rates may not help cool inflation since import costs are pushing consumer prices higher, Surapong said today in Bangkok.

"The interest rate policy may be less effective,'' he said. "We will use fiscal policies, and other measures to boost incomes and economic growth to counter inflation.''

An anti-government protest, which started May 25, is being led by an activist group that spearheaded demonstrations contributing to the overthrow of former prime minister Thaksin Shinawatra in a 2006 coup. About 1,500 people are at the protest today, down from a peak of 13,000 on May 31, Surapol Thuanthong, a deputy Royal Thai Police spokesman, said today by telephone.

The benchmark SET Index of stocks fell 2.8 percent today after last week dropping the most since August. The Thai brokerage unit of DBS Group Holdings Ltd. today downgraded its SET Index rating to neutral from outperform, citing renewed political tension.

"Faster inflation and the higher cost of living because of oil prices makes people more cautious about spending money,'' said Prasarn Trairatvorakul, president of Kasikornbank Pcl, the nation's fourth-largest lender. "Political uncertainties have started to hurt investors' confidence. These are risks to economic growth.''

Core inflation, which excludes fresh food and fuel prices, accelerated to 2.8 percent in May from a year earlier, from 2.1 percent a month earlier, the Commerce Ministry said today. Economists in the Bloomberg survey estimated core inflation would be 2.5 percent.

The central bank uses core inflation to help set monetary policy and aims to keep the pace of price increases within a zero-to-3.5 percent range this year.

Confidence Falls

Consumer confidence, which fell for the first time in six months in April, may decline further in coming months as oil prices increase, Thanavath Phonvichai, an economist at the University of the Thai Chamber of Commerce said May 15.

Indonesia's consumer prices rose 10.4 percent in May from a year ago, the Central Statistics Bureau said today. India's inflation has accelerated to its fastest pace in more than 3 1/2 years.

Thailand's government on May 30 told four refineries controlled by state-owned PTT Pcl to cut diesel prices for six months to ease inflation. The measures, costing the companies about 2.2 billion baht ($67.5 million), will give cheaper fuel to buses in Bangkok. The price of diesel, widely used for transportation and manufacturing, jumped 17 percent last month, according to PTT's Web site.

``The ministry will look at all products to see what we can do to reduce the public's burden,'' Siripol Yodmuangcharoen, permanent secretary for commerce told a press briefing today.

The inflation rate in Southeast Asia's second-largest economy may be as high as 5.8 percent this year from 2.3 percent in 2007, the state planning agency forecast May 26.

European Inflation Accelerates More Than Forecast

European inflation accelerated faster than economists forecast this month as oil prices jumped to a record, adding to what European Central Bank President Jean-Claude Trichet has called policy makers' biggest challenge.

The inflation rate in the euro area rose to 3.6 percent, matching a 16-year high, from 3.3 percent in April, the European Union statistics office in Luxembourg said in a statement today. Economists had forecast a 3.5 percent rate, according to the median of 36 estimates in a Bloomberg survey.

The ECB, which aims to keep consumer-price growth below 2 percent, said yesterday there are signs inflation expectations have been trending up recently and it's imperative that they remain contained. The Frankfurt-based bank celebrates its 10th anniversary this weekend, having failed to meet its target for the last eight years, and holds its next policy meeting June 5.

"This will probably encourage speculation that the ECB may pull the rate trigger later this year, the growth slowdown notwithstanding,'' said Martin van Vliet, an economist at ING Group in Amsterdam. "Investors better brace themselves for an ultra-hawkish statement from the ECB president at next week's press conference.''

Separate figures published by the statistics office today show that unemployment in the euro area remained at a record low of 7.1 percent in April.

The euro pared declines after the inflation report. It was down 0.2 percent to $1.5496 as of 11:17 a.m. in Brussels, after earlier dropping to as low as $1.5461.

Crude Oil

Crude oil prices have doubled in the last 12 months and reached a record $135.09 May 22. Food commodities have also surged in the last year, boosting how much consumers are paying for staples such as bread and milk. Wheat has gained 45 percent in the past year and corn has surged 51 percent.

Retail sales in Germany, Europe's largest economy, unexpectedly dropped for a second consecutive month in April, according to figures published today, as faster inflation left consumers with less money.

Companies and households expect prices to continue to rise. A European Commission index of manufacturers' selling price expectations increased this month, while consumers' outlook for their personal finances deteriorated. Greencore Group Plc, the world's biggest maker of prepared sandwiches, this week said it's been passing on cost increases to customers.

Fed Concerns

In the U.S., Federal Reserve bank presidents also have expressed growing concern about rising prices.

"If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic'' economy, Bank of Dallas President Richard Fisher said on May 28.

The ECB has kept its key rate at a six-year high of 4 percent to counter inflation even as the economy of the 15 euro nations cools. The central bank is concerned that wages will increase to compensate for the higher cost of living, threatening a wage-price spiral.

"There has been a sharp deterioration in the inflation picture,'' said Simon Barry, an economist at Ulster Bank in Dublin. "Our base case is the ECB is on hold for now, but the inflation risk has increased and there's no room for complacency.''

The inflation figures published today are an estimate. The statistics office will publish a detailed breakdown of the data and the core rate on June 16.

India's GDP Growth Holds at Slowest Pace Since 2005

India's economic growth held at the weakest pace since 2005 as the highest interest rates in six years discouraged consumer spending and investment.

Asia's third-largest economy expanded 8.8 percent in the three months to March 31 from a year earlier, matching the revised gain of the previous quarter, the statistics office said in a statement in New Delhi today.

Finance Minister Palaniappan Chidambaram today urged policy makers to ensure they don't damp economic growth as they try to slow inflation, which has doubled in the past four months to 8.1 percent. India's central bank has twice forced lenders to set aside more reserves in 2008, after raising its key interest rate seven times in the past 2 1/2 years to 7.75 percent.

"The dilemma between rising inflation and slowing growth will continue and we expect the central bank to tighten monetary policy,'' said Sonal Varma, a Mumbai-based economist at Lehman Brothers LLC. "The growth momentum is slowing.''

Lehman cut India's growth forecast to 7.3 percent for this year from 7.6 percent.

The Sensitive index, which has declined 20 percent this year, rose 0.8 percent to 16452.90. The benchmark 10-year government bond fell, pushing the yield close to a one-month of 8.11 percent. The rupee climbed to the highest in more than two weeks, gaining 0.7 percent to 42.49 a dollar.

India's economy expanded 9 percent in the year ended March 31, the least since 2005, today's report said. Growth may slow further to about 8.5 percent in the current financial year, Chidambaram told reporters in New Delhi today.

Manufacturing Slows

Manufacturing growth almost halved to 5.8 percent in the three months to March 31, while farm production slowed to 2.9 percent. Growth is holding up as construction gained 12.6 percent, the fastest pace in almost two years, as the government stepped up efforts to build new airports, roads and power plants.

Still, India is unwilling to risk higher inflation ahead of national elections due by May 2009, analysts said. Prime Minister Manmohan Singh's Congress party has already lost ground in nine of 11 provincial polls held since January 2007 as rising prices of rice, lentils and other staples hurt the 52 percent of India's 1.1 billion people who live on less than $2 a day.

Growth is important to reduce poverty in India, said Sanjay Peters, an economics professor at ESADE Business School in Barcelona. Reining in inflation at the cost of growth is an unviable justification, he added.

Overseas Borrowings

"We must ensure that the instrument of interest rates moderate inflation and at the same time does not dampen growth,'' Chidambaram said today. "We have to ensure industrial growth does not slacken.''

To boost growth, the finance ministry yesterday raised the limit on overseas borrowing by companies for domestic spending. Infrastructure companies can borrow as much as $100 million overseas, up from a previous limit of $20 million, while other companies can borrow as much as $50 million, compared with an earlier cap of $20 million.

India's expansion, to be sure, is still the second-fastest after China among the world's major economies, spurred by rising incomes. The South Asian country is growing at more than three times the pace of the U.S. and the nations sharing the euro.

The Reserve Bank of India, whose priority is to keep prices in check, has increased the cash reserve ratio, or the proportion of deposits lenders must set aside, seven times since December 2006 to slow money supply and cool inflation.

All Options

That's yet to put a dent in India's inflation rate, which is now the highest in more than 3 1/2 years. The Federation of Indian Chambers of Commerce and Industry say relying on monetary tools isn't the correct way to tackle inflation, which is largely driven by supply-side factors.

Inflation may accelerate further as Oil Minister Murli Deora yesterday said the government will consider all options, including an increase in fuel prices, to cut losses at state-run refiners that have risen to more than $1 billion a week as crude oil costs soar.

"It is supply shortage that is aggravating inflation in the case of food products, and the inflationary pressure in the case of manufactured products is the result of continuous cost buildups of raw materials and oil products,'' the trade body said in a report on May 24. "Rising interest rates, besides curtailing demand, are also adding to the cost of companies.''

Cars, Motorcycles

Tata Motors Ltd.'s profit in the year ended March 31 gained at the slowest pace in at least five years as steel and other input costs increased and consumer demand diminished. Bajaj Auto Ltd., India's second-biggest motorcycle maker, expects sales to remain sluggish this year. Industry accounts for a quarter of India's $912 billion economy.

"The year ahead is a challenging year,'' said C. Ramakrishnan, chief financial officer at Tata Motors, the Indian automaker that's buying Ford Motor Co.'s Jaguar and Land Rover units. "High interest rates, raw material costs and credit availability continue to be challenges.''

As industry slows, demand for services such as travel and banking, which make up 55 percent of the economy, may also wane. Airbus SAS, the world's largest planemaker, said this week that India is among the weakest airliner markets right now and the country's carriers may cancel or delay plane orders in the next 12 months.

Japan Inflation Slows to 0.9% as Gasoline Tax Expires

Japan's consumer-price inflation slowed from a decade high as the temporary expiry of a gasoline tax helped ease the pressure from rising food and energy costs.

Core consumer prices, which exclude fruit, fish and vegetables, climbed 0.9 percent in April from a year earlier after rising 1.2 percent in March, the fastest pace since 1998, the statistics bureau said today in Tokyo. The median estimate of 35 economists surveyed by Bloomberg was for a 1 percent gain.

Gasoline prices nationwide fell by about 15 percent last month after the government failed to renew a tax bill that expired April 1. The tax was reinstated this month, and surging costs of food and energy will keep squeezing households and companies, presenting the central bank with the challenge of supporting growth while keeping prices under control.

"The Bank of Japan seems to be carefully monitoring whether recent food and oil price increases will become a trigger for inflationary expectations, which could induce further rounds of price increases,'' said Hideo Kumano, a former central bank official and now chief economist at Dai-Ichi Life Research Institute. "The central bank can neither raise rates nor cut them for the time being because the economy has slipped into a something that looks a bit like stagflation.''

Other reports today showed the unemployment rate rose to a seven-month high of 4 percent and household spending plunged 2.7 percent, the fastest pace since September 2006. The ratio of jobs available to each applicant fell to a three-year low.

The yen traded at 105.57 per dollar as of 8:45 a.m. in Tokyo from 105.54 before the reports were published.

Oil, Wheat

Crude oil exceeded $135 a barrel for the first time last week and gasoline in Japan surged to a record 160.3 yen a liter ($5.75 a gallon) this week. Wheat has soared more than 50 percent in the past year, prompting Japan's government to raise prices of the grain 30 percent last month.

McDonald's Holding Co. Japan Ltd. and Ajinomoto Co. announced plans this month to raise prices to make up for higher energy and grain costs.

McDonald's will raise prices of cheese burgers and Big Macs by about a fifth from today. Ajinomoto's mayonnaise will increase for the second time in a year in July.

Inflation in Tokyo quickened in May, today's report showed, signaling nationwide prices may have risen at a faster pace this month. Tokyo's core prices, a harbinger of the nationwide index, rose 0.9 percent this month from a year earlier, following a 0.7 percent gain in April.

Costlier daily necessities pushed consumer sentiment to a six-year low in April and caused retail sales to grow at the slowest pace since July. Most Japanese households expect prices to keep rising.

Inflation Expectations

The central bank is monitoring how recent price increases may affect consumers' inflationary expectations and companies' price-setting, BOJ Governor Masaaki Shirakawa said this month.

"The Bank of Japan's caution against inflation is accompanied by concerns about an economic slowdown so it's not warranting policy tightening at the moment,'' said Hiromichi Shirakawa, a former central bank official and now chief economist at Credit Suisse Group in Tokyo. "Still, Governor Shirakawa seems to realize that stabilizing inflationary expectations is very important in setting the bank's policy.''

Inflation may exceed the upper limit of the central bank's zero to 2 percent guideline for price stability next quarter, according to Ryutaro Kono, chief economist at BNP Paribas in Tokyo.

"Even if that happens, the Bank of Japan won't be prompted to raise interest rates because of its concern about the effect on economy's growth,'' Kono said.

Japan Production Falls for a Second Month, Signaling Slowdown

Japan's factory production fell in April for a second month as the U.S. slowdown spread, signaling the nation's export-led expansion may have peaked.

Output declined 0.3 percent from March, when it slid 3.4 percent, the biggest drop in five years, the Trade Ministry said today in Tokyo. The median estimate of 35 economists surveyed by Bloomberg News was for a 0.5 percent drop.

Today's report is more evidence that the world's second- largest economy is slowing after exports and consumer spending drove annualized growth of 3.3 percent last quarter. Central bank Governor Masaaki Shirakawa said this week that the U.S. slump, coupled with record oil and commodity prices, has made the outlook extremely uncertain.

"It looks like exports and manufacturing activity peaked out last quarter,'' Seiji Shiraishi, chief economist at HSBC Securities in Tokyo, said before the report. Slumps in output have coincided with each of Japan's three recessions since 1991.

Exports are showing signs of slowing. Overseas shipments in the first four months of 2008 rose at less than half the pace of the same period a year ago.

Crude oil exceeded $135 a barrel for the first time last week. Toyota Motor Corp., Japan's biggest company, says the higher prices of energy and raw materials, along with the yen's 6 percent rise against the dollar this year, will cause profit to fall for the first time in seven years.

Toyota isn't alone in facing a profit squeeze. Japanese companies' pretax earnings will fall 5 percent in the year ending March 2009, the first decline since 2001, according to a report last week by Shinko Research Institute.

That may mean smaller summer bonuses for Japanese workers and less spending by companies on new plant and equipment.

The higher cost of commodities isn't all bad news for Japan's exporters. It's increasing the wealth of resource-rich countries such as Russia, spurring demand for Japanese products in those markets. Demand from emerging economies has so far made up for a slump in shipments to the U.S., Japan's largest market.

U.S. Economy: First-Quarter Growth Estimate Raised

The U.S. economy grew more than previously estimated in the first quarter as Americans shunned imports and exports climbed to a record.

The 0.9 percent gain at an annual pace in gross domestic product compares with an advance estimate of 0.6 percent, the Commerce Department said today in Washington. Fourth-quarter growth was 0.6 percent. Separate figures today showed the number of Americans continuing to receive jobless benefits rose to a four-year high this month.

"It's basically like an airplane at stall speed, just skimming above the water,'' Jeffrey Frankel, an economist at Harvard University who is a member of the panel that dates U.S. economic cycles, said in a Bloomberg Radio interview. "I wouldn't rule out going into a recession later in the year."

Trade remains the bright spot for an economy that is likely to slow this quarter as surging fuel and food bills and falling home values force consumers to cut back. The economy will expand just 0.1 percent this quarter as spending slows further, according to economists surveyed by Bloomberg this month.

"We are somewhere in the twilight zone between an expansion and a recession,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. "We will have a poor pace of growth through the year.''

First-time claims for unemployment insurance rose to 372,000 last week, higher than economists had forecast, from 368,000 the previous period, the Labor Department reported. Those continuing to receive benefits jumped to 3.104 million in the week ended May 17, the highest level since February 2004.

Stocks, Treasuries

Stocks rose, with the Standard & Poor's 500 index up 0.5 percent to close at 1398.26. Treasuries slid after benchmark 10- year note yields yesterday climbed above 4 percent for the first time since January. The yields were at 4.08 percent at 4:33 p.m. in New York, from 4 percent late yesterday. The dollar rose 0.9 percent to $1.5503 per euro.

Honeywell International Inc., the world's largest maker of airplane controls, said last week it is confident in its full- year forecasts as demand outside the U.S. remained robust. Record oil prices have boosted orders for refining equipment and building projects in the Middle East, India and China has pushed up sales of its energy conservation devices.

"This year is going to be another strong year in a more difficult environment,'' Honeywell's Chief Executive Officer David Cote said on May 19 at a conference in Florida.

Gains Abroad

Eaton Corp., the world's second-largest maker of hydraulic equipment, reaffirmed its full-year profit forecast on May 28 and projected international markets will grow as much as 6 percent. The company's U.S. markets will expand 2 percent to 3 percent this year.

Procter & Gamble Co., the world's largest consumer-products company, said last month that third-quarter profit rose on increased sales overseas and higher prices.

While a recession is often described as consecutive declines in GDP, the National Bureau of Economic Research, the official arbiter in the U.S., defines contractions as a ``significant'' decrease in activity over a sustained period of time.

The group says that in a recession, decreases would be visible in payrolls, production, sales and incomes, in addition to GDP.

"For that reason, the U.S. is probably already in a mild recession,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "The economy will be pretty flat on its back through much of this year.''

Feldstein on Recession

Harvard University economist Martin Feldstein, president of the NBER, today said the economy probably shrank last quarter.

"Virtually every indicator is heading down,'' Feldstein said in a Bloomberg Television interview. Still, there's ``a chance'' the U.S. won't go into a recession.

The Bush administration is betting the U.S. will keep growing as the economy benefits from the impact of tax rebates and seven interest-rate cuts by the Federal Reserve since September.

"We think that it will avoid a recession, Keith Hennessey, director of the White House National Economic Council, said in an interview with Bloomberg Television. "We think that growth is continuing in the second quarter'' and will strengthen in the second half of the year, he said.

Today's GDP report is the second of three estimates. The median forecast of 74 economists surveyed by Bloomberg News was for a 0.9 percent pace. Projections ranged from gains of 0.6 percent to 1.3 percent.

Growth Slowing

Following a 0.6 percent growth rate in the fourth quarter, the reading was the smallest six-month expansion rate in five years.

The trade deficit shrank to an annual pace of $480.2 billion, the smallest since the third quarter of 2002. Trade's contribution to growth jumped to 0.8 percentage point, four times more than previously estimated.

Consumer spending, which accounts for more than two-thirds of the economy, rose at a 1 percent annual rate in the first quarter, the same as estimated last month. The gain was the smallest since the 2001 recession.

The revisions also showed bigger gains in incomes than previously estimated, easing concern that spending will collapse.

Personal income increased at a 5.1 percent annual pace from October through December, compared with an initial projection of 4.2 percent. For the first quarter, income growth was revised up to 4.7 percent from 4.4 percent.

Income growth may slow in coming months as the labor market softens. The U.S. has lost jobs for four consecutive months this year, and payrolls may post another decline for May, according to the Bloomberg survey.

Inventories Drop

The gain in growth last quarter would have been even larger if not for a reduction in estimates for inventories. Companies cut stockpiles at a $14.4 billion annual rate, compared with an initial estimate of a $1.8 billion gain. The figures added 0.2 percentage point to growth, less than the previously estimated contribution of 0.8 percentage point.

A measure of total sales, which strips out stockpiles, was revised to a gain of 0.7 percent at an annual rate rather than a 0.2 percent drop. Sales rose at a 2.4 percent pace in the fourth quarter.

There are signs that demand is slowing even more. Auto sales in April slid to a 14.4 million annual rate, the lowest level since 1998, industry figures show. Spending this quarter will grow at a 0.5 percent pace, the smallest gain since 1991, according to the median estimate in a monthly Bloomberg survey.

Fed Forecasts

Fed policy makers last month trimmed their economic growth projections for this year by about 1 percentage point to 0.3 percent to 1.2 percent.

"A number of participants were of the view that financial headwinds would probably continue to restrain economic activity through much of next year,'' minutes of the Fed's April meeting showed last week.

Residential construction decreased at a 25.5 percent pace, less than previously estimated, though still the biggest drop since 1981.

Reports this month showed declines in home building will remain a drag on growth. Builders began work in April on the fewest single-family houses in 17 years.

The figures today also included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, increased 0.3 percent to an annual rate of $1.57 trillion.

German May Inflation Accelerates More Than Forecast

Inflation in Germany, Europe's largest economy, accelerated more than economists forecast in May as the cost of oil surged.

Consumer prices rose 3 percent from a year earlier after increasing 2.6 percent in April, when measured using a harmonized European Union method, the Federal Statistics Office in Wiesbaden said today. Economists expected inflation to quicken to 2.9 percent, according to the median of 25 forecasts in a Bloomberg News survey. In the month, prices increased 0.6 percent.

A jump in crude-oil prices to a record $135.09 a barrel on May 22 is pushing up inflation in Germany and across the economy of the 15 euro nations, hurting consumers' purchasing power. The European Central Bank this month left its key interest rate at a six-year high of 4 percent to counter inflation pressures.

"Oil prices are really holding inflation hostage,'' said Nick Matthews, an economist at Barclays Capital in London. "Stronger German data will probably push this month's euro-area inflation back to March's record level of 3.6 percent. That will stay the ECB's hand.''

Adding to the ECB's inflation concerns, German import prices rose more than economists expected in April, gaining 0.9 percent from March, the statistics office said today. Economists forecast a 0.7 percent increase.

The price of heating oil rose as much as 13.3 percent and diesel was up to 8.7 percent more expensive in May from a month earlier, the statistics office said.

ECB's Limit

German inflation has exceeded the ECB's limit of just under 2 percent for more than a year as the euro's appreciation fails to offset higher oil and food costs. Germany's ECB council member, Axel Weber, has said the bank may need to raise interest rates to contain inflation.

The ECB shelved a planned increase in September after the U.S. housing slump caused money and credit markets to seize up.

Investors have increased bets that faster inflation will force the ECB to raise its key lending rate. EONIA swap contracts, a widely used market gauge of interest-rate expectations, rose as high as 4.25 percent yesterday from 3.99 percent two weeks ago.

Malaysia's Economy Grows 7.1% on Commodity Shipments

Malaysia's economy expanded faster than expected in the first quarter as surging prices boosted palm oil and petroleum exports and higher salaries for civil servants spurred consumer spending.

Southeast Asia's third-largest economy grew 7.1 percent in the first three months from a year earlier, down from a 7.3 percent gain in the fourth quarter, the central bank said in Kuala Lumpur today. That was more than the median estimate of a 6.5 percent increase in a Bloomberg News survey of 17 economists.

Bank Negara Malaysia expects a modest easing in growth in the second half due to a slowdown in major economies. Public expenditure may slow as surging costs force Prime Minister Abdullah Ahmad Badawi's government to delay projects, while inflation may crimp consumer spending.

"The following quarters may see slower growth as exports and related sectors like manufacturing decelerate,'' said Suhaimi Ilias, an economist at Aseambankers Malaysia Bhd. Delays in implementing infrastructure projects after the recent elections will also have an impact on construction, he added.

Abdullah's ruling coalition, which lost its two-thirds majority in parliament for the first time in 34 years in March 8 elections, may find it difficult to push through increases in pump fuel prices needed to cap government subsidy costs, said Lee Heng Guie, an economist at CIMB Investment Bank Bhd.

Fuel Subsidies

Bank Negara today also removed limits on the amount of funds that local companies and individuals can borrow in foreign currencies to provide greater access to finance and reduce the cost of doing business.

Malaysia will announce measures to revise fuel subsidies, which may balloon to 53 billion-ringgit ($16.4 billion) this year amid record crude prices, after a Cabinet meeting on May 30, Prime Minister Abdullah said today.

"Rising food and fuel subsidies together with accelerating building-material costs have warranted a critical review of fiscal spending priorities,'' Lee said. "Still, any price- sensitive policy changes are best pushed through when the economy is in a position of strength.''

Malaysia last month said it is reviewing many state projects because of rising costs, as surging global prices of steel, cement and other building materials threaten construction planned under Abdullah's 200 billion-ringgit ($62 billion) development budget for the five years to 2010.

Political Uncertainty

Abdullah also faces calls to step down from former Premier Mahathir Mohamad and some members of his own party amid claims by the opposition it can convince enough ruling coalition lawmakers to defect and form a new government by mid-September.

"Higher food costs and potential hikes in fuel prices could weigh on consumption, and business investment could weaken in the current political uncertainty,'' said Lee at CIMB. "With the still-tough external environment ahead, and cautious domestic sentiment post general elections, we expect the pace of growth to turn relatively weaker in the second half.''

Malaysia's $151 billion economy is still expected to grow between 5 percent and 6 percent this year, Governor Zeti Akhtar Aziz said today, maintaining the central bank's March forecast.

"Uncertainties in the global environment will remain,'' Zeti told reporters in Kuala Lumpur. "Still, the Malaysian economy is expected to remain resilient.''

Monetary Policy

Malaysia's monetary policy stance remains consistent with the outlook for inflation and economic growth, Zeti said. The central bank will assess its outlook for consumer prices in 2008 after the government's review of fuel subsidy costs, she added.

Construction grew 5.3 percent in the first quarter, after a 4.7 percent gain in the previous three months, according to today's report. Services climbed 8 percent, after a revised 9.3 percent increase in the fourth quarter.

Private consumption increased 11.8 percent, compared with a previous rise of 10.2 percent. Public consumption rose 10.5 percent, after a 4.2 percent gain earlier. Domestic demand expanded 10.1 percent, accelerating from 9.1 percent.

Exports of goods and services in the last quarter increased 6 percent, compared with 7.8 percent in the previous three months. Sales of palm oil, crude oil and liquefied natural gas gained, while electronics shipments declined.

Malaysia is a producer of Intel Corp. chips and Dell Inc. computers, and Southeast Asia's second-largest producer of oil, gas and palm oil.

Manufacturing grew 6.9 percent, compared to 5.6 percent in the last quarter of 2007.

Agriculture expanded 6.3 percent, from 4.7 percent in the fourth quarter. Mining grew 3.7 percent, up from 3.5 percent previously.

Vietnam inflation hits 25.2% in May

Vietnam's annual inflation accelerated to 25.2 per cent this month from 21.4 per cent last month, its seventh consecutive double-digit reading and one of the highest in Asia.

The government's General Statistics Office estimated yesterday that the average inflation in the first five months of this year would rise to 19.1 per cent compared with the same period last year, from the 17.6 per cent in January-April.

Monthly inflation data are not fully available but the inflation rate this month could be the highest since 1991 when Vietnam reported its annual inflation at 67.5 per cent.

Imports have soared, pushing the trade deficit to an estimated US$14.4 billion in the first five months, more than three times higher than in the same period of last year, the government said on Monday.

The government has sought approval from the one-party National Assembly, or parliament, to cut the 2008 growth target to 7 per cent from between 8.5 per cent and 9 per cent previously.

The Asian Development Bank forecast Vietnam's growth slipping to 7 per cent from 8.3 per cent in 2007 and estimated inflation of 18.3 per cent for all of this year.

Hanoi estimated food prices this month jumped 67.8 per cent from last May. Food accounts for 42.8 per cent of the goods and services basket that Vietnam uses to calculate consumer inflation.

Rice prices, which have nearly tripled on the international market this year, have nearly doubled in Vietnam since last May.

Last week Prime Minister Nguyen Tan Dung told the central bank to adjust interest rates in line with market moves and urged a better management of the base rate used for deposits and lending to help control credit growth and overall inflation.

The reminder came after Vietnamese banks started raising interest rates as the central bank removed a 12 per cent ceiling on dong deposit rates and raised three other key rates to fight a surge in inflation.

Thai Economic Growth Accelerates on Consumer Spending

Thailand's economic growth accelerated in the first quarter as the first elected government since a coup in 2006 took office, underpinning a rebound in consumer confidence and spending.

Gross domestic product in Southeast Asia's second-biggest economy expanded 6 percent in the three months to March 31 from a year earlier, the government said today in Bangkok. That was faster than the 5.7 percent in the fourth quarter.

Prime Minister Samak Sundaravej's government came to power in February, pledging to spur economic growth by spending on trains and buses traffic clogged Bangkok and on irrigation to boost farm production in rural areas. Templeton Asset Management Ltd.'s Mark Mobius said increased government spending this year will buoy Thailand's economy and boost stocks.

"We are starting to see accelerated investment and consumption,'' Ampon Kittiampon, secretary general of the government's National Economic and Social Development Board, said today. "The government's economic stimulus measures are taking effect.''

The quarterly expansion from last year matched the median estimate of 15 economists in a Bloomberg survey.

Consumption Climbs

Private consumption rose 2.6 percent from a year earlier, after gaining a revised 1.8 percent in the fourth quarter. Consumer confidence started rising in November from a five-year low amid anticipation that a democratically elected government would pursue policies more designed to promote growth than those of the military junta it replaced.

Total investment in the first quarter rose 5.4 percent from a year earlier, accelerating from 4 percent in the previous three months, today's report showed.

The baht gained about 7 percent against the dollar in the first three months of this year and Thailand's SET Index of stocks fell 4.8 percent.

"The new government has policies which are very positive toward businesses,'' Mobius, who oversees about $47 billion of emerging-market equities at Templeton in Singapore, said in an interview on May 24 in Bangkok.

GDP expanded 1.4 percent in the first quarter from the previous three months, when it grew a revised 1.7 percent, seasonally adjusted.

Manufacturing expanded 9.7 percent following a revised 8 percent pace in the previous three months. Private construction expanded 0.4 percent after contracting 8.5 percent in the fourth quarter.

Boosting Spending

Finance Minister Surapong Suebwonglee said May 20 that the government will increase spending to counter cooling economic growth as rising oil prices spur inflation and constrain consumer spending. Consumer prices gained 6.2 percent in April from a year earlier, the fastest pace since 2005.

"Higher fuel prices will increase inflation,'' said Mobius. "That in turn will dampen growth and consumption.''

The government plans to spend 1.84 trillion baht ($57 billion) in its fiscal year starting Oct. 1, a 12 percent increase from the forecast 1.64 trillion baht expenditure this year, it said on May 20. The spending will help the government meet its target of expanding the economy by 6 percent this year from 4.8 percent in 2007, Surapong said.

Surging Imports

Imports grew 34.5 percent in the first quarter, more than double the prior three months. Overseas purchases will surge 25.5 percent this year, compared with 9.6 percent in 2007 the central bank forecasts.

Exports, which make up 70 percent of the economy, slowed to 21 percent in the first quarter from 24 percent in the previous three months, according the Bank of Thailand. Still, soaring rice prices, which breached $1,000 a metric ton for the first time this month, helped buoy the value of shipments to a record in March.

"Thailand is a very vibrant exporter of agricultural commodities and manufacturing products,'' Mobius said at a Thai stock market conference in Bangkok on May 24. "This is another reason why we want to invest in Thailand.''

Spain April Producer Prices Accelerate on Higher Oil

Producer prices in Spain accelerated more than economists expected in April to the fastest pace in 13 years as higher oil increased cost pressures for manufacturers.

The price of goods leaving Spain's factories, farms and mines rose 7.2 percent from the year earlier period after a 6.9 percent increase in March, the National Statistics Institute in Madrid said in an e-mailed statement today. That exceeded the 6.9 percent median forecast in a Bloomberg survey of four economists. Prices rose 0.8 percent on the month.

The price of crude has more than doubled in the past year and touched a record $135.09 a barrel in New York last week. Surging energy prices helped push euro-region consumer-price inflation to 3.3 percent in April, exceeding the European Central Bank's 2 percent ceiling for a eighth straight month.

"Energy prices saw the biggest increase,'' Jose Luis Martinez, a strategist at Citigroup Inc. in Madrid, said. "There is a sense of pessimism in looking at the economic data out of Spain.''

The price of gasoline leaving refineries in Spain increased 29 percent on the year while food prices were up 11 percent.

Spain's consumer price inflation, measured according to EU standards, rose 4.2 percent on the year in April.

Saudi Arabia inflation rises 10.5% in April on rents, food

Annual inflation in the world's top oil exporter Saudi Arabia rose to 10.5 per cent in April, its highest level in at least 27 years, fuelled mainly by rents and food prices.

Inflation is a challenge across the Gulf Arab region, where governments which peg their currencies to the ailing US dollar are raising wages and subsidies, bringing in price controls and tightening lending curbs to dampen the impact of price rises.

In Saudi Arabia, the cost of living index rose to 115.2 points in April from 104.3 points a year earlier, the economy and planning ministry's statistics unit said on Saturday.

The index however clocked its weakest monthly rise this year, adding 0.9 per cent from March. Annual inflation, as measured by the index, was 9.6 per cent in March.

'Inflation is not on an abating pattern despite a decline in money supply growth. It has more to do with rents and food than with money supply,' said John Sfakianakis, chief economist at SABB bank, HSBC's affiliate in Saudi Arabia.

April rents soared 20.4 per cent from a year ago, while food and beverages costs added 16 per cent, according to the data.

'Rents inflationary pressures are continuing to rise. It is an issue that has to be addressed in terms of both supply and demand for housing and commercial space and of the real estate speculation,' Mr Sfakianakis added.

Food prices account for about 26 per cent of the cost of living index while rents account for 18 per cent of the index.

Price rises are plaguing the world's biggest oil-exporting region, where economies are surging on a near sevenfold increase in oil prices during the last six years.

European Services, Manufacturing Growth Slowed in May

Europe's service and manufacturing industries expanded at the slowest pace in five years in May after oil prices surged, the euro appreciated to a record and banks became more reluctant to lend.

A preliminary estimate of Royal Bank of Scotland Group Plc's composite index fell to 51.1 from April's 51.9, NTC Economics Ltd, which carries out the survey, reported today. Economists expected a decline to 51.5, according to the median of 16 forecasts in a Bloomberg News survey. A reading above 50 indicates expansion.

Oil reached a record $135.09 a barrel yesterday, raising costs for consumers and companies alike. Europeans are also having to cope with higher credit costs resulting from the U.S. housing slump and the euro's 17 percent appreciation against the dollar in the past year.

"All forward-looking indicators are very weak,'' said Sunil Kapadia, an economist at UBS Ltd. in London. "The economy will continue to deteriorate. Banks will continue to tighten credit. We expect real disposable income to shrink in 2008.''

The European Central Bank has refused to follow the U.S. Federal Reserve and Bank of England in paring interest rates after record food and energy prices drove inflation above 3 percent in the 15-nation euro region. The bank aims to keep inflation just below 2 percent.

"It would take a major sustained drop, or a major rise, in the index to shift the ECB away from its de facto neutral stance,'' said Holger Schmieding, chief European economist at Bank of America Corp. in London.

Stock Markets

The ECB's stance has been partly responsible for benchmark stock indexes in Germany and France underperforming shares in the U.S. and U.K. in the past six months. Banks and consumer-related companies have led the declines.

Germany's DAX Index has lost 7.1 percent since Nov. 23, while France CAC 40 slid 8.9 percent. The U.K.'s FTSE 100 is only down 1.3 percent in the same period, while the Standard & Poor's 500 Index in the U.S. slipped 3.2 percent.

Today's decline was led by services. RBS's gauge of growth in services industries such as banking and telecommunications slumped to 50.6 from 52.0, matching a 4 1/2-year low reached in January. A measure of business expectations fell to 56.1 from 58.7, the lowest since November 2001.

In the U.K., first-quarter growth in services industries was revised down to 0.5 percent from an original estimate of 0.6 percent, the country's statistics office said today.

Banks, Airlines

Credit Agricole, the French bank hardest hit by the subprime crisis, said last week it plans to raise 5.9 billion euros ($9.3 billion) in a rights offer to replenish capital after first- quarter profit fell 66 percent. Deutsche Bank AG, Germany's biggest lender, reported its first quarterly loss in five years last month.

Air France-KLM Group, Europe's largest airline, yesterday posted its first quarterly loss since 2003 and said earnings this year will drop almost 30 percent as fuel prices soar and an economic slowdown dents demand for travel.

"The change in the economic context and a doubling of fuel prices will make the current year challenging,'' Air France Chief Financial Officer Philippe Calavia said.

RBS's index of manufacturing activity declined to 50.5, the lowest since August 2005, from April's 50.7. French consumer spending on manufactured goods unexpectedly fell for a second month in April as shoppers curbed purchases of cars and clothes, a report by France's statistics office showed today.

Credit Squeeze

The U.S. housing slump has driven up the cost of credit globally. The world's biggest financial companies have posted at least $383 billion in writedowns and credit losses since the start of last year after the subprime mortgage market collapsed.

The resulting economic slowdown has prompted the Fed to lower its benchmark rate 3.25 percentage points since September to 2 percent. The Bank of England has lowered rates three times since early December, taking its benchmark to 5 percent.

The rate cuts contributed to the euro's appreciation to records against the dollar and the pound.

Profit at Infineon Technologies AG, Europe's second-largest semiconductor maker, would be cut by 120 million euros if the dollar stayed at current levels against the euro in fiscal 2009, Chief Executive Officer Wolfgang Ziebart said last month.

ECB Bank Lending Survey

The impact of the financial turmoil on credit standards in the first quarter was especially strong for loans financing mergers and acquisitions and corporate restructuring, the ECB said on May 9, citing its quarterly bank lending survey.

The effect was more limited for loans financing fixed investment or inventories and working capital, the bank said.

Business confidence in Germany, Europe's biggest economy, increased as companies stepped up spending on machinery and construction, the Munich-based Ifo Institute said on May 21. The country's economy expanded 1.5 percent in the first quarter, the fastest pace in 12 years.

"I still expect the European economy to grow over the rest of the year, supported by the German economy, which is holding up well,'' said Natascha Gewaltig, a London-based economist at Action Economics.

German companies have improved efficiency and benefited from booming demand for their goods in emerging economies. Private- sector labor costs rose 1 percent last year, the smallest increase in the 27-member European Union. That has helped companies remain competitive even after the euro reached a record $1.60 last month and oil prices doubled in the past year.

Not all euro-region countries are faring as well as Germany. Growth in Spain slowed to 0.3 percent in the first quarter, the worst performance in almost 13 years.

Italy avoided the fourth recession in a decade, even as a slump in consumer spending clouds the outlook for the rest of the year. Europe's fourth-biggest economy expanded 0.4 percent after contracting the same amount in the fourth quarter, Rome-based statistics office Istat said today.

ECB President Jean-Claude Trichet has said economic growth in the second quarter will be less flattering than the 0.7 percent expansion achieved in the first three months.

U.K. Economy Grows the Least Since 2005 on Investment

The U.K. economy grew at the slowest pace since 2005 in the first quarter after higher credit costs hurt construction and business services slowed.

Gross domestic product rose 0.4 percent in the three months through March, the Office for National Statistics said in London today. The result matched the agency's original estimate and the median forecast of 31 economists in a Bloomberg News survey. Business services including accountancy and advertising expanded at the weakest pace since 2003.

"Firms have cut back on investment sharply, and that's only natural when you have the biggest financial shock since the Great Depression,'' said Dominic White, an economist at ABN Amro Holding NV in London and a former U.K. Treasury official. "We're looking at a weak picture, and the odds of a negative second quarter are fairly high.''

The Bank of England is trying to steer an economy threatened by slowing growth and faster gains in consumer prices. While inflation jumped the most since 2002 last month, optimism among U.K. households fell to the lowest in more than 15 years and billionaire investor George Soros said this week the U.K. may fall into a recession.

The pound was little changed after the release and traded at $1.9812 at 12:08 p.m. in London. Against the euro, it traded at 79.45 pence.

Political Fortunes

Slowing growth will make it harder for Prime Minister Gordon Brown to revive the fortunes of his Labour Party, which yesterday lost a by-election in Crewe and Nantwich in northern England. That was the opposition Conservative Party's first such victory in more than quarter of a century.

"People are worried after 10 years standards of living rising, we have a problem with rising food prices,'' Brown told reporters today in London. "They want us to address these challenges and I believe that I can do so.''

Investment dropped 1.6 percent in the first quarter from the previous three month after economists in a Bloomberg survey forecast a gain of 0.2 percent. The business services and finance category grew 0.4 percent and consumer spending rose 1.3 percent on the quarter, the statistics office said.

GDP growth slowed from 0.6 percent in the fourth quarter, and expanded 2.5 percent from a year earlier.

Recession Risk

Today's report adds to evidence the slowdown in the economy is worsening and may spread to consumer spending in coming months. Bank of England Governor Mervyn King said last week that Britain may have an odd quarter or two of negative growth. Consumer confidence fell to the lowest in more than 15 years in April, GfK NOP Ltd said April 30, and unemployment rose for a third month.

"The central bank expects quite a significant slowdown,'' Bank of England policy maker Andrew Sentance said in a radio interview with a university radio station in Warwick, England.

British Land Co. Plc, the biggest developer in London, on May 20 reported its first annual loss in at least 20 years after writing down the value of office buildings and malls.

U.K. homebuilders will cut tens of thousands of jobs as the 19 billion-pound ($37 billion) industry grapples with the housing slump, Stewart Baseley, chairman of the Home Builders Federation, said in an interview this week.

"Business investment looks soft,'' said James Shugg, an economist at Westpac Banking Corp. in London. "Growth should be pretty sluggish for the rest of the year.''

Growth in services industries was revised down to 0.5 percent in the quarter from an original estimate of 0.6 percent.

Production

Overall industrial production, which includes oil and gas extraction and utilities, contracted 0.2 percent from the final three months of 2007, more than an April 25 estimate of 0.1 percent.

"The U.S. is slipping quickly into recession and I think this recession is on its way over the Atlantic,'' said former Financial Services Authority Chairman Howard Davies in an interview on May 21.

Exports were unchanged and imports fell 0.6 percent, the statistics office said.

The Bank of England has cut the benchmark interest rates three times since December to 5 percent to kick-start the economy. Still, the nine-member Monetary Policy committee voted 8-1 to keep rates unchanged this month as concerns about faster consumer-price increases outweigh those about economic growth, minutes from the May 8 meeting showed May 21.

Inflation accelerated to 3 percent in April from 2.5 percent the month before. King said May 14 that inflation may exceed the government's 3 percent ceiling for several quarters.

Italy Economy Grows, Dodges First-Quarter Recession

Italy's economy grew in the first quarter, avoiding a fourth recession in a decade, even as a slump in consumer spending clouds the outlook for the rest of the year.

The $2 trillion economy, Europe's fourth-biggest, expanded 0.4 percent after contracting the same amount in the fourth quarter when consumer spending fell 0.2 percent, Rome-based statistics office Istat said today. The first-quarter expansion was twice the median forecast of 22 economists surveyed by Bloomberg.

Record oil prices and food costs have pushed the inflation rate to the highest in more than a decade, sapping confidence among consumers who are also facing increased borrowing costs. Newly-elected Prime Minister Silvio Berlusconi's first act after taking office this month was to pass tax cuts on property and overtime pay and offer to freeze mortgage payments for homeowners at risk of default.

"A relatively good figure for the first quarter doesn't mean the trend will be positive,'' said Paolo Pizzoli, senior economist at ING Bank NV in an interview with Bloomberg television today. He expects growth of 0.1 percent in the second and third quarters.

Finance Minister Giulio Tremonti said this week 2008 growth will be almost zero.

Germany, France

The economies of Italy's biggest trading partners, Germany and France, so far have appeared more resilient. Gross domestic product in Germany rose 1.5 percent from the fourth quarter, the fastest pace in 12 years. French GDP rose 0.6 percent, twice the rate of the fourth-quarter.

Still, there are signs that the stronger euro and the slowdown in the U.S. economy triggered by the collapse of the subprime mortgage market is beginning to weigh on growth in the second quarter. French consumer spending unexpectedly fell for a second month in April, a report by Insee, the Paris-based statistics office said today.

The price of crude has doubled in the past year, reaching a record $135.09 a barrel yesterday, and Italian drivers are now set to pay more than 1.5 euros a liter for gas, or more than $9 dollars a gallon. Companies are also feeling the pain. State- controlled airline Alitalia SpA had 215 million euros ($338 million) of pretax losses in the first quarter, more than 2 million euros a day, partly from the surge in fuel costs.

Italy's growth prospects are being further dimmed by the euro's gain against the dollar, which makes its exports more expensive in the U.S., its third-biggest market. The single currency has gained 6 percent in the past six months and trades for about $1.57. Italian exports plunged 1.3 percent in the fourth quarter, Istat said today.

Sales Decline

Bulgari SpA, the world's third-largest jeweler, reported this month first-quarter earnings that missed analysts' estimates. Exchange-rate fluctuations sliced about 4 percentage points off sales in the quarter, mainly because of the dollar, the company said.

"A euro that is overvalued against the dollar creates an unsustainable penalty for our exports,'' Emma Marcegaglia, president of Italy's employers lobby Confindustria, said in a speech yesterday in Rome. "The ECB shouldn't underestimate the slowdown.''

Berlusconi's return to power, and his implementation of the tax cuts and mortgage relief appear to have had an impact on consumer confidence. Optimism among Italians jumped in May to the highest level this year.

The new government on May 21 announced the elimination of the country's main property tax and a reduction in levies on overtime pay, in an effort to increase spending and productivity.

Italy slipped to 46th in the World Economic Forum's 2007-2008 competitiveness ranking, trailing Latvia and Bahrain. The country came last in terms of labor productivity -- a key measure of economic growth and competitiveness -- among the 30-member Organization for Economic Cooperation and Development. No other European country has been through three recessions in five years.

The International Monetary Fund in April cut its Italian growth forecast to 0.3 percent for this year and the next, which would make Italy the worst-performing economy among the Group of Seven nations and the 15 countries sharing the euro. Italy, will grow at half the pace of the U.S. and a fraction of the 1.2 percent growth rate for the euro region, the IMF said.

The Italian statistics office didn't provide a breakdown of the GDP figure in the preliminary estimate for the first-quarter. Istat will release its final report on Italian GDP on June 10.

Chile Posts Slowest First-Quarter Growth Since 2003

Chile's gross domestic product expanded at the slowest pace since 2003 in the first quarter as mining output slumped and a drought cut hydroelectricity supplies.

Chile's economy expanded 3 percent in the first quarter from the year-earlier period, slower than a 4 percent rise in the previous quarter and less than the 3.2 percent median estimate in a Bloomberg survey of 20 economists.

The worst drought in 50 years in Chile lowered hydropower reserves as shortages of natural gas curtailed output by generators, resulting in a slowdown in economic activity and industrial production. Chile's President Michelle Bachelet this week promised to solve energy problems after the central bank cut its growth forecast for the year to as low as 4 percent.

"Economic activity is facing supply restrictions in sectors like manufacturing, mining and electricity generation because of gas shortages, bad weather and strikes,'' said Alfredo Coutino at Moody's Economy.com Inc. in West Chester, Pennsylvania. "Those things should be transitory, so we could see a rebound of economic activity in the second quarter.''

Mining output declined 2.7 percent because of labor disputes and lower yields from mines. Copper output fell 8.4 percent in March from a year earlier, the National Statistics Institute said. Chile is the world's biggest copper producer.

Output from the utility industry dropped 16 percent, the central bank said. Electricity generation fell 2.2 percent in March because of the drought and gas shortages.

Recent Rainfall

Energy Minister Marcelo Tokman today said recent rainfall will help replenish reservoirs, reducing the risk of power shortages. Shares of Santiago-based hydroelectricity generator Colbun SA rose 12 percent this week as dams filled.

"If this process continues, if we have more water, that's good news for the cost of energy,'' Finance Minister Andres Velasco said today. "As we've seen, if the energy sector is running better, the whole economy runs better.''

In central and southern Chile, where Codelco, Antofagasta Plc, Anglo American Plc and Freeport-McMoRan Copper & Gold Inc. have mines, between 45 percent and 70 percent of the electricity comes from water-driven turbines.

In an annual address to lawmakers, Bachelet said Chile will develop ethanol from woodlands, consider plans for solar power plants in the desert and encourage hydroelectric development. The government will increase spending on infrastructure such as roads, ports and dams by 60 percent this year, and set up a $6 billion fund abroad to finance overseas study for postgraduate students, she said.

Public Holidays

The economy grew 5.8 percent in the first three months, taking into account public holidays, and should accelerate in the second quarter, Velasco said today. Investment rose 15 percent in the first three months of the year, and foreign direct investment reached almost 10 percent of quarterly GDP, he said.

"For all the respect I have for Velasco, he'll find the bright spot in anything,'' said Luis Arcentales, a New York- based economist at Morgan Stanley.