In the near future, TV is going to be available anywhere, on any device, at any time. Just don’t expect it to be free.
That’s because of the big, unanswered question being asked by networks, cable companies, advertisers and technology providers: How do we make money from it?
Viewers are already taking full advantage of online television. Broadcast networks make many of their shows available on Web sites like Hulu and YouTube a day after they air, and many cable stations also put their shows on the Web.
In December, more than 178 million Americans watched TV online, streaming 33 billion shows, according to online data tracker comScore.
But the business model for free Internet television doesn’t work yet. Networks can’t get advertisers to pay the same as they do for broadcast and cable TV, and networks and cable providers are reluctant to lose their mutually beneficial partnerships.
In the traditional TV model, networks get paid tens of billions of dollars by advertisers and billions more in retransmission fees by cable and satellite providers. Satellite and cable providers get paid in subscription fees by customers.
The free Internet TV model cuts out the middle man: Networks post their content directly online and advertisers pay for the right to place their ads on the Web site and within the video. Satellite and cable providers aren’t part of the equation, and networks lose out on their licensing fees.
Advertisers hesitant to join in
The loss of revenue from cable and satellite companies isn’t the only reason why free Internet TV isn’t working yet. Advertisers remain coy: Broadcast and cable TV advertising is a $70 billion a year business, but Internet TV advertising has yet to crack $1 billion, according to Matt Wasserlauf, chief executive of online advertising network BBE.
Many advertisers are wary of sponsoring online TV, primarily because the measures of those ads’ effectiveness and reach are still up in the air, say media analysts.
"Advertisers aren’t going to pay for the right to sponsor content unless they know how many people are watching it," said Todd Dagres, general partner at Spark Capital. "The technology is available, but it is still in the process of being implemented."
The online video ad world is also a different ball game than the TV commercial sphere. Internet TV ads are interactive, unlike traditional TV ads, and effective Internet TV ads require a whole new level of creativity. Advertisers are still trying to determine the best way to reach potential customers online.
"The way people approach online ads is qualitatively different from the way they approach TV ads," said Shishir Mehrotra, director of video monetization at Google (GOOG, Fortune 500). "The biggest blockers to advertisers from making the jump to the Internet from TV are creative ones."
The lack of live TV online — and the big advertising bucks that come with it — is another huge factor preventing online TV from being successful. Though some networks have begun to air some live content online, notably CBS’s online coverage of the NCAA basketball tournament, live Internet TV is far from pervasive.
Live sporting events like the Super Bowl and live shows like American Idol command the biggest advertising dollars fast cash without a hassle. But separate licensing fees, bandwidth limitations and a low return on investment have held networks back from putting more live content online thus far.
With the business model still shaky, media company CEOs have suggested that free online TV is coming to an end.
How the online TV business can work
With free heading out the door soon, subscription services are the likely replacement.
Media CEOs like News Corp’s (NWS, Fortune 500) Rupert Murdoch, Disney’s Bob Iger and NBC’s Jeff Zucker, who co-own Hulu, have all hinted at making Hulu a subscription-based service. They just haven’t said how much users will have to pay.
Netflix (NFLX) has been operating a successful subscription-based streaming service for quite some time, and on Monday, Walmart (WMT, Fortune 500) announced that it had purchased Netflix’s online streaming video competitor Vudu. In December, Apple said it had negotiated deals with CBS (CBS, Fortune 500) and Disney (DIS, Fortune 500) to launch a streaming subscription-based service for Apple TV.
Cable companies have gotten in on the action as well. CNNMoney.com parent company Time Warner (TWX, Fortune 500) partnered with Comcast (CMCSA, Fortune 500) last summer to test its subscription-based "TV Everywhere," which made Time Warner content available online to Comcast subscribers for no additional charge. Comcast deemed the project a success, and has continued the TV Everywhere partnership on its Fancast Web site.
Subscription services generally bring more content to the Web than free services, including some cable shows that have been exclusively available on TV or for purchase on iTunes.
There’s something in it for the cable companies too: As technology improves and consumers begin watching more online, on-demand content directly on their television sets, cable and satellite providers could have a role in bringing that content to consumers by providing customer service for Internet TV like they do for "regular" TV.
"If consumers want high-quality content with a high-quality experience and high-quality service, there’s a place and a role for companies that have cables piped into your house," said David Wertheimer, executive director of the Entertainment Technology Center at the University of Southern California.
In the end, experts say that the free, advertising-supported model may exist for some content, but the subscription model will have to at least run along side it.
Experts say commoditized programming like news, cooking programs and how-to shows will stay free, because there will always be another site offering the same content for free. But your favorite shows that can’t be duplicated and cost millions of dollars to produce are something you will have to pay for.
"Every piece of content that is commoditized by nature has to be free," said Ran Harnevo, chief executive of 5min Media, an independent digital media group. "On the other hand, if everything were free, you would lose the production value of good shows. So people will have to pay for content that’s not commoditized."
India’s credit rating may be raised from junk if Finance Minister Pranab Mukherjee provides a comprehensive plan to roll back fiscal stimulus and cut the budget deficit this week, Moody’s Investors Service said.
“If we think the exit path is well articulated and well executed, the local currency rating could be upgraded,” Aninda Mitra, a Singapore-based sovereign analyst at Moody’s, said in a telephone interview on Feb. 19. India’s long-term local currency debt is placed at Ba2 by Moody’s, two levels below the investment grade and at par with Armenia and Turkey.
Mukherjee has an opportunity to narrow the budget shortfall as accelerating economic growth boosts tax revenue and a stronger political mandate after last year’s elections paves the way to resume asset sales. Rating changes have less impact on India than other countries like Greece, which borrow more from abroad. India’s foreign borrowings make up only about 4 percent of government debt compared with 83 percent for Greece, according to Citigroup Inc.
Stocks, Bonds Gain
“India has lived with a budget deficit for so long, and with a high growth rate you can run a deficit,” said Andrew Michael Spence, a Nobel prize-winning economist and professor emeritus at Stanford University’s Graduate School of Business. “You don’t want the credit rating to go too low. It’s more signaling rather than anything else.”
India’s budget deficit may narrow to 5.5 percent of gross domestic product in the financial year starting April 1 from 6.8 percent of GDP in the previous year, Chakravarthy Rangarajan, Prime Minister Manmohan Singh’s top economic adviser, said on Feb. 19. Mukherjee is scheduled to unveil the budget in parliament in New Delhi on Feb. 26 at 11 a.m.
Stocks snapped a two-day decline while the yield on India’s benchmark 10-year note fell the most in more than four weeks after Moody’s comment. The rupee gained the most since Feb. 15.
India’s Sensitive Index rose 1.1 percent to 16,369 on the Bombay Stock Exchange and the rupee appreciated 0.3 percent to 46.14 per dollar. Bond yields fell four basis points to 7.84 percent as of 1:24 p.m. in Mumbai.
Indian government debt accounts for about 80 percent of the gross domestic product. Standard & Poor’s and Fitch Ratings have a BBB-, the lowest investment grade rating, on Indian local currency debt.
Positive Outlook
“Although the debt level is high relative to other emerging markets, the fact remains that it’s not increasing sharply,” Mitra said. “It’s hovering around 80 percent of the GDP. So, that’s a reasonably good outcome and which is why we shifted towards the positive outlook,” in December 2009.
Mukherjee, who allowed the budget deficit to widen to provide fiscal stimulus to the economy amid a global recession, is relying on asset sales and faster growth to spur tax collections in next year’s budget.
India’s $1.2 trillion economy may grow 7.2 percent in the current fiscal year through March, accelerating for the first time since 2007, the statistics office said Feb. 8.
Singh’s government plans to reduce stakes in 68 companies including NMDC Ltd., the nation’s largest iron-ore producer, and NTPC Ltd., the biggest electricity provider, after he returned to power in May without the help of communist parties, who as part of the previous coalition had opposed the policy.
Inflation Risk
The government may borrow a net 3.8 trillion rupees in the year starting April 1, compared with 3.97 trillion rupees this year, said Abheek Barua, an economist at the Mumbai-based HDFC Bank Ltd.
Central bank Governor Duvvuri Subbarao last month urged the finance ministry to cut borrowings to support the monetary policy’s goal to contain inflation. Subbarao raised the proportion of deposits lenders need to maintain as cash reserves to 5.75 percent from 5 percent and said monetary policy alone won’t be effective in curbing price-gains unless Mukherjee rolls back fiscal stimulus.
“The growth has rebounded and at the same time there is a risk of inflation,” Mitra said. “Inflation expectations need to be anchored better, either through higher policy rates or if that process could be helped by lower government borrowing and spending.”
India’s inflation accelerated to 8.56 percent in January, the most in 15 months.
“India in on the cusp of a new tryst, which is fiscal destiny, and I hope they will take it,” Mitra said.
Hot or iced, with whipped topping or not — Seattle’s Best Coffee fans can soon have it their way.
Burger King (BKC) will start serving up the Starbucks (SBUX, Fortune 500)-owned brand at 7,250 of its restaurants across the United States by September, for $1 to $2.79 a cup, the company announced today.
"The addition of Seattle’s Best Coffee expands on our ‘Have it Your Way’ brand promise by offering our guests even more beverage options and strengthens our ability to remain competitive in a continuously changing industry," the restaurant chain’s senior marketing VP, John Schaufelberger, said in a statement.
The news comes amid a weak economy in which consumers seem to be pinching pennies and avoiding burgers, soda and beer.
Last week McDonald’s posted same-store sales were down 0.7% in January in its U.S. restaurants. Burger King competes with McDonalds’ McCafe to attract morning customers. Burger King doesn’t post monthly figures, but showed same-store sales in the U.S. and Canada were down 3.3% in the second quarter of 2010.
Seattle’s Best Coffee will replace Burger King’s BK Joe coffee menu, launched in 2005.
The sandwich chain Subway also signed a deal with Seattle’s Best back in November and now sells its coffee in 8,500 stores.
Germany’s Axel Weber leads the race to succeed Jean-Claude Trichet as president of the European Central Bank and Portugal’s Vitor Constancio is likely to be his deputy, a survey of economists shows.
Of 27 economists in the Bloomberg News survey, 24 said Weber will be chosen to replace Trichet, whose term ends on Oct. 31 next year. Only three picked Italy’s Mario Draghi, Weber’s main rival for the job. Twenty economists said Constancio will succeed Lucas Papademos as vice president when his term expires on May 31 this year. Euro-region finance ministers are due to vote on the vice president post today.
Jockeying for the ECB presidency has already started as governments across the 16-nation euro region grapple with a fiscal crisis that has prompted investors to question the sustainability of the monetary union. Installing Weber at the ECB’s helm next year would give Europe an outspoken inflation fighter who has stressed the need for fiscal discipline to protect the euro.
“Weber has a very strong personality and will definitely give the euro a very powerful and visible face,” said Laurent Bilke, a former ECB economist now at Nomura International Plc in London, who expects Bundesbank President Weber to win. “He’s a recognized economist and will make a difference. Under him, the ECB may even grow in its international stature.”
Weber’s Influence
Weber, 52, has sped to the top of European policy making. Like Federal Reserve Chairman Ben S. Bernanke, he is a former academic. He joined the Bundesbank as president from the University of Cologne in 2004 after a scandal over hotel expenses forced predecessor Ernst Welteke to resign.
Weber quickly established himself as one of the most influential of the ECB’s 22 Governing Council members, often pre-empting policy shifts and moving currency and bond markets with his comments.
He landed on Trichet’s so-called “Black List” last November by revealing the ECB would tighten its lending to banks. The remarks breached ECB protocol that major announcements be made by the president and also came within a week of a council meeting, when officials are supposed to refrain from commenting on policy.
Weber is perceived by economists as one of the ECB’s toughest inflation-fighting “hawks” because of the emphasis he places on curbing risks to price stability.
Hawks and Doves
If Constancio wins the ECB vice presidency, he would strengthen Weber’s chances by lending balance to his ticket. Constancio, Portugal’s central bank chief, is known as a “dove” who pays more attention to economic growth. Between them they would also ensure representation from northern and southern Europe at the top of the ECB.
Luxembourg’s Yves Mersch and Belgium’s Peter Praet are also on the ballot for the vice presidency business cards design. If finance ministers pick Mersch, who like Weber has a reputation as an inflation hawk, Draghi’s chances of replacing Trichet would rise.
Draghi, 62, left Goldman Sachs Group Inc. to become governor of the Italian central bank in January 2006. He replaced Antonio Fazio, who resigned after a criminal investigation was opened into his handling of Italian bank mergers. A former economics professor like Weber, Draghi chairs the Financial Stability Board and has pushed for limits on bankers’ pay and stronger capital requirements.
A spokesman for Italian Prime Minister Silvio Berlusconi said last week that the government backs Draghi for the ECB job.
‘Neck and Neck’
German Chancellor Angela Merkel has won French President Nicolas Sarkozy’s support for Weber’s candidacy, German magazines Spiegel and WirtschaftsWoche reported this month.
“It will be a neck-and-neck race,” said Holger Sandte, chief European economist at WestLB Equity Markets in Dusseldorf, who expects Draghi to win. “Policy makers probably want someone who’s a bit more diplomatic than Weber,” he said, adding the ECB “resides in Frankfurt and it’s pretty much designed in a German way.”
Germany, Europe’s largest economy, hasn’t held a major European policy position since Walter Hallstein led the Commission of the European Economic Community from 1958 to 1967. It didn’t put up a candidate when the ECB’s first president was picked in 1998, pushing instead for Wim Duisenberg of the Netherlands in exchange for the ECB being headquartered in Frankfurt, Germany’s financial capital.
The decision on Trichet’s successor “ultimately comes down to politics,” said Nick Matthews, senior economist at Royal Bank of Scotland Group Plc in London, who believes Weber will prevail. “I would imagine the argument that ‘it’s Germany’s turn’ is being used in the discussion.”
Musical Chairs
Whoever takes over from Trichet, the ECB’s six-member Executive Board may need to be reconfigured to ensure one country doesn’t dominate it.
With Juergen Stark and Lorenzo Bini Smaghi, Germany and Italy are already represented on the board. Economists said one of them will probably have to step down before his term expires to make way for Weber or Draghi and avoid giving either country too much weight in the ECB’s decision making.
“Stark will be upgraded to Bundesbank president,” said Carsten Brzeski, senior economist at ING Group in Brussels, who believes Weber will win the race. “Stark is a good Prussian. He’s dutiful and does everything that’s good for his fatherland. He’ll clean his desk.”
Fixing millions of gas pedals and brakes and convincing customers their vehicles are safe could end up being the least of Toyota’s challenges. Some experts think the price tag from legal settlements could end up topping the company’s estimate of $2 billion in recall costs.
There are already more than 30 U.S. lawsuits filed against Toyota involving the problems with its gas pedals alone, according to Craig Hutson, senior investment grade analyst at Gimme Credit, a bond research service firm. And there are more lawsuits are in the works.
"Lawyers are champing at the bit to get at these guys, and the company has come out and largely admitted mistakes in respect to these issues," said Hutson. "It’s hard to put a dollar amount on it, but multi-billion dollar costs are not out of the realm of possibility."
Hutson isn’t alone in worrying about how much lawsuits could hurt Toyota. Credit rating agency Moody’s cited the litigation risks when it warned Tuesday that it might downgrade Toyota’s credit ratings.
The company also faces at least one class action suit involving problems with the brakes on 2010 models of the Prius and other hybrid vehicles. Toyota announced a recall for those hybrids Tuesday.
New reports of problems with the steering of its Corolla could mean more lawsuits against Toyota.
Safety experts estimate official complaints involving Toyota gas pedals show there have been 19 fatalities involving the recalled vehicles.
But Gary Robb, an attorney in Kansas City who is looking at filing cases, says he believes that number will increase significantly as people look more deeply into accidents for which no cause was ever determined.
"We’ve had so many calls from so many people now that this news has come out," he said. "Accidents that were heretofore attributed to driver error are very likely due to a malfunction of the gas pedal. There’s going to be dozens of those incidents arising."
Cases involving death or serious injury will likely be handled in individual lawsuits.
Suing to reclaim lost value. Robb said he’s also looking at a class action case to try to recover billions of dollars he claims were lost in the resale value of the recalled vehicles. He said his experts estimate total losses could be in the $6 billion to $8 billion range paydayloans. "For many people their car is their second largest investment," he said.
Other experts suggest that the loss in resale value is not as high as Robb’s figure, but that it is still likely in the billions.
Kelley Blue Book, a leading used-car value service, is lowering its estimated prices for the recalled models this Friday by 2.5% to 3.5%. That’s enough to lower the value of each vehicle by between $250 and $800.
The National Highway Transportation Safety Administration estimates that more than 6 million U.S. vehicles are affected by the recall. So based on Kelley Blue Book’s estimates, the overall loss in resale value is likely to be at least $2 billion.
Toyota wouldn’t comment on its legal exposure from the recalls. As to the reduction in resale value by Kelley Blue Book it said, "Historically Toyota and Lexus vehicles have held their value very well relative to other vehicles. We expect that to be true in the future as well."
It’s not clear whether courts will allow plaintiffs to collect that much money. James Henderson, a law professor at Cornell University, said legal precedent is against them.
But Henderson does think the recall opens Toyota for a rash of new personal injury cases. He added that if it is determined that Toyota knew of problems with the gas pedals and did not warn a driver involved in an accident, the company could be hit with punitive damages.
Hutson said beyond the cost of any jury verdicts or settlements, the lawsuits have the potential of causing continued damage to Toyota’s reputation, keeping the problems and company’s failures in the news. That could cost the company additional sales going forward.
He said if any documents come out which prove Toyota engineers knew something needed to be fixed, it will be difficult for Toyota to ever regain consumers’ trust.
"When your image is one that has been largely built on quality and dependability, you can’t afford that kind of smoking gun," Hutson said.
European finance chiefs sought to bolster international confidence in Greece’s ability to cut its budget deficit by endorsing the country’s austerity plan and promising to ensure the government delivers on it.
“The European members of the G-7 will make sure it is managed,” French Finance Minister Christine Lagarde told reporters on Feb. 6 after meeting counterparts and central bankers from the Group of Seven in Iqaluit, Canada. European Central Bank President Jean-Claude Trichet said the ECB is “confident” Greece will cut its deficit below the limit of 3 percent of gross domestic product in 2012 from 12.7 percent.
The struggles of the Greek government to convince investors it can reduce the largest budget gap in the European Union without outside assistance forced their way on to the agenda of the G-7 talks after the MSCI World Index of stocks fell to its lowest in four months on concern of a default.
“I just want to underscore they made it clear to us, they the European authorities, that they will manage this with great care,” U.S. Treasury Secretary Timothy F. Geithner said in Iqaluit. “The European authorities gave us a very comprehensive review of the program now in place to address the challenges faced by the Greek economy.”
Greek bonds have tumbled in the past two months, pushing the yield on the country’s 10-year debt above 7 percent, the highest since 1999, the year the euro began trading. The premium investors charge to hold Greek 10-year bonds over the benchmark German bund has widened to 356 basis points, about 10 times what it was two years ago, and credit-default swaps on Greek debt rose to a record on Feb. 5.
Foreign-Exchange Markets
“No measure of official reassurance would be enough unless the nations in question retain credibility in financial markets, which remains to be seen,” Geoffrey Yu, a currency strategist at UBS AG in London, said in a note to clients. “We expect foreign-exchange markets to continue trading on a risk-averse tone.”
Borrowing costs have also jumped for Portugal and Spain, raising concern among policy makers that Greece’s woes will be shared elsewhere in Europe and overseas as governments try to rein in the record budget deficits they ran up fighting the worst global recession since World War II.
“This is a crisis that has been on the horizon for quite a while,” Harvard University Professor Niall Ferguson told Bloomberg Television, adding that Belgium and Italy are also at risk. “The contagion is going to spread.”
‘Intense Concern’
German Finance Minister Wolfgang Schaeuble said in Iqaluit that policy makers outside Europe “have the impression that Europeans will solve this problem and that they’re aware of the problem.” Canadian Finance Minister Jim Flaherty said the size of Greece’s economy means “in global terms it’s not of intense concern.”
Schaeuble said Greece still has to “pay a price” for running up the deficit and said the euro remains “stable.”
“Euro-area members of the G-7 gave an update on the efforts and commitments by the Greece government to ensure fiscal sustainability and economic reform,” Trichet said. “We said that the euro area would continue to monitor closely the implementation of this stability program.”
Greek Prime Minister George Papandreou has already pledged to step up budget cuts if needed and EU Monetary Affairs Commissioner Joaquin Almunia, who also attended the G-7 meeting, said last month that leaders have no “plan B” to help Greece.
Painful Measures
Most Greeks object to increases in the retirement age and fuel taxes even as a majority say painful measures are needed to reduce the budget gap, according to a Kappa Research poll for To Vima newspaper, published yesterday.
Harvard’s Ferguson said Greece’s economy will suffer as it tries to restore fiscal order with the resulting increase in unemployment triggering public strikes. Teachers, hospital workers and tax collectors already have called a 24-hour strike for Feb. 10 and private-sector workers will follow two weeks later.
“It’s going to be messy,” said Ferguson, who predicted Germany and France will provide financial aid if needed. “Suddenly the markets woke up and realized these weren’t credible fiscal policies.”
Australia’s central bank said economic growth will continue to accelerate this year even if policy makers are forced to raise the benchmark interest rate by another three quarters of a percentage point.
The economy will be growing at an annual pace of 3.25 percent in the three months through December 2010, up from 2 percent last quarter, the bank said today in Sydney. Officials based their forecast on an assumption that the overnight cash rate target will climb to 4.5 percent this year, in line with market estimates.
Reserve Bank Governor Glenn Stevens unexpectedly kept borrowing costs unchanged this week, saying information about the impact of the bank’s record three increases last quarter “is still limited.” A report this week showed retail sales unexpectedly fell in December for the first time in five months and stock markets tumbled today amid increasing concern that the global recovery may falter.
“They are uncertain and waiting for more information,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. “It looks like they need greater justification to tighten further. They need to see a broadening in global growth.”
The Australian dollar traded at 86.57 U.S. cents at 12:37 p.m. in Sydney from 86.90 cents before the statement was released. The two-year government bond yield fell 4 basis points to 4.05 percent. A basis point is 0.01 percentage point.
Stocks Fall
Australia’s S&P/ASX 200 Index dropped 2.8 percent to 4,493.40 at 12:05 p.m. in Sydney, setting the benchmark gauge on course for its lowest close in five months.
While interest rates are “no longer at exceptionally low levels,” it is “likely” that borrowing costs will be increased further over time to ensure inflation stays within Stevens’s target range of between 2 percent and 3 percent, the bank said in its quarterly monetary policy statement.
Stevens became the first central banker in the world to raise borrowing costs three times last year after Australia’s economy skirted the global recession, helped by A$20 billion ($17 billion) in cash handouts to consumers from Prime Minister Kevin Rudd and another A$22 billion in spending on roads, railways and schools.
U.S., Europe
By contrast, officials in the U.S., the U.K. and Europe have kept their benchmark lending rates at historic lows, partly on concern that recoveries in their economies will be hampered by high unemployment and weak consumer sentiment.
Australia’s economy will expand 2.5 percent in the June quarter of 2010 from a year earlier, and 3.5 percent in the year through June 30, 2011. Three months ago, the bank predicted growth rates of 2.25 percent and 3.25 percent respectively.
Core inflation will cool this year to an annual pace of 2.5 percent from 3.25 percent, before accelerating again to 2.75 percent in 2011.
The bank said those forecasts are based on the “technical assumption” of an increase in the cash rate, “with the assumed path broadly consistent with market expectations as the statement was finalized.”
Money market yields continue to reflect expectations for “further tightening, though at a slightly slower pace” than anticipated three months ago. “The cash rate is expected to reach around 4.5 percent by the end of the year,” today’s statement said.
“They’re being a little more specific and open about” their assumptions about future interest rates, said David de Garis, a senior economist at National Australia Bank Ltd. in Sydney. “They were probably always assuming something similar to the market.”
Rate Bets
Traders are betting there is only an 18 percent chance of a quarter-point increase in the overnight cash rate target when policy makers meet on March 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 12:33 p.m.
Today’s forecasts “represent a modest upward revision” to figures released in November, “with recent data suggesting that the economy starts the current upswing in activity with somewhat less spare capacity than earlier thought likely,” today’s statement said.
“It now looks likely that the unemployment rate has peaked at around 5.75 percent, a much better outcome than thought likely early last year,” when the government forecast the jobless rate would peak at 8.5 percent this year.
Australia’s unemployment rate dropped in December to an eight-month low of 5.5 percent after employers added 135,700 jobs between September and the end of 2009, the biggest four- month surge in hiring in more than three years.
Energy Demand
Increased demand for workers is being stoked by a surge in investment by companies such as Chevron Corp., which is expanding its Gorgon liquefied natural gas venture in Western Australia to meeting rising demand from Asia for energy.
“Mining investment is expected to increase further from its already very high level,” today’s statement said. Exports of resources will “grow strongly, reflecting capacity increases resulting from the high level of mining investment over recent years.
“However, growth outside of the mining sector is expected to be only modest, reflecting the reallocation of productive resources within the economy.”
This is partly due to the surge in Australia’s currency, “which has reduced the international competitiveness of import- competing and exporting sectors, including the manufacturing and tourism sectors,” the bank said.
Household Spending
While increased hiring and an annual 13.6 percent surge in house prices last quarter have helped stoke consumer confidence, which jumped in January by the most in six months, “households are still taking a more cautious approach to their spending than was the case a few years ago,” today’s statement said.
One risk to today’s forecasts is whether the nation’s recent economic performance was prompted by a “bring-forward” of spending by consumers and businesses amid last year’s earlier interest-rate cuts and government spending, the bank said.
“If so, underlying growth would be soft into 2010 as the effects of the temporary stimulus fade,” the bank said. This may be offset by “the improvement in the outlook in the resources sector” which is “clearly not due to temporary policy factors.”
There are also questions about the durability of recent growth in the world’s largest economies, which have been boosted by temporary fiscal measures and the restocking of inventories by companies, today’s statement said.
“For a sustained recovery to take hold, a substantially stronger pick-up in private demand than has been evident to date will be required,” the bank said. “Many of these countries also face very significant fiscal challenges that will need to be addressed over time.”
The U.S. economy grew at the fastest pace in more than six years during the fourth quarter of 2009, according to a government report Friday.
The nation’s gross domestic product, the broadest measure of economic activity, rose at a 5.7% annual rate in the fourth quarter. That was much stronger than expected and provides another sign that a recovery in the economy is taking hold.
Economists surveyed by Briefing.com had forecast growth of 4.7%.
Good end to a terrible year. The growth in the fourth quarter was the highest since the third quarter of 2003. The economy rose at a 2.2% annual pace in the third quarter of last year.
But even with the strong growth in the second half of 2009, the economy shrunk by 2.4% last year. That was the biggest drop in 63 years and first annual decline for the economy since 1991.
The GDP report does not mark an official end of the recession. That determination will be made by the National Bureau of Economic Research, and that group typically waits months — if not more than a year — to declare when recessions ended and began.
But two straight quarters of economic growth is typically a sign of a recovery, and most economists agree that the recession ended at some point in the middle of 2009. The Federal Reserve even used the word "recovery" in the statement following its latest meeting earlier this week.
Inventories lead the way. Much of the improvement was driven by a turnaround in inventories, the supply of goods that businesses produce in anticipation of sales. Businesses slashed inventories in late 2008 and early 2009 due to concerns about worsening economic conditions.
According to Friday’s report, 3.4 percentage points of growth in the fourth quarter came from the change in inventories. A pickup in auto production was a significant part of the inventory turnaround, even though auto sales themselves only rose modestly.
But the U.S. consumer was somewhat of a bystander in the fourth quarter, as personal consumption grew at only a 2% annual rate in the period. Spending by consumers accounts for more than two-thirds of economic activity.
Lakshman Achuthan, managing director of Economic Cycle Research Institute, said that growth from inventories shouldn’t be dismissed since they are typically a driving force of strong recoveries.
"In late 2008 into 2009 everyone freaked out to prepare for Armageddon," he said. "They fired everybody and stopped buying inventories. That overreaction is what’s being undone. Yes, you have to have jobs growth, but we’ll get that next, probably in January or February."
Other economists say the turnaround in inventories isn’t enough to lead to strong growth over a sustainable period. A better labor market that would give consumers the confidence and money they need to spend is also necessary.
"I’m not dismissing the inventory gain, but now that inventories are getting more into line with final sales, then the thrust of economic growth depends on final demand picking up," said John Silvia, chief economist with Wells Fargo Securities.
Stimulus, exports, also feed growth. Economic growth in the third quarter was greatly attributed to the federal stimulus bill passed at the beginning of 2009. But stimulus doesn’t appear to have had as big of an impact in the fourth quarter.
Federal spending on stimulus does not show up on any one line of the GDP report. In fact, government spending contributed little to growth by itself, even as non-defense spending by the federal government rose at an annual 8% rate in the quarter.
But money pumped into the economy by tax cuts, such as the first-time home buyer tax credit, coupled with spending by businesses that received stimulus dollars, did have an impact in the quarter, even if it was harder to quantify.
An 18% jump in the value of exports also played a major role in the economy’s rebound, contributing nearly 2 percentage points of growth. Silvia said exports have a chance to be a significant source of growth in the coming year, helped by the weaker dollar and stronger growth in developing economies, particularly in Asia.
Investment in business equipment and software jumped at a 13% annual rate, the biggest increase in nearly four years. That spending added almost a full point to GDP, and is often a precursor to employers starting to hire once again.
Slower growth ahead? Sung Won Sohn, economics professor at Cal State University Channel Islands, said there was good news in the report, but cautioned that the economy is unlikely to keep growing at such a strong pace.
"The not-so-good news is that most of the growth came from temporary factors such as inventories and government stimulus which can’t be sustained," he said.
Sohn’s forecast is for GDP growth of 2.6% in the first quarter, and only a bit higher than that for the full year. Silvia expects GDP growth of 2.3% in the first quarter of 2010, and 2.7% for the full year.
But Achuthan said growth doesn’t have to stay above 4% or 5% for the economy to start making significant gains.
"It is normal to have a burst of acceleration coming out of a recession, particularly a sharp recession, and then have growth ease back," he said.
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