Global economic woes deepen

09 Jan, 2009

Bleak economic data in Europe and disappointing December retail sales figures in the United States unsettled financial markets on Thursday, strengthening the case for more government stimulus and encouraging rate cuts. The Bank of England, which cut its key interest rate to an historic low of 1.5 percent from 2.0 percent, said the world economy appeared to be undergoing an unusually sharp and synchronised downturn. “Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time,” the central bank said in a statement. Wal-Mart Stores, the world’s largest retailer, posted weak December same-store sales, and cut its quarterly earnings forecast as several other retailers also warned that earnings would be worse than expected in the fourth quarter that included the key 2008 holiday shopping season. The European Commission earlier revealed that economic sentiment in the 15 countries using the euro plunged to an all-time low in December amid rising unemployment and as inflation expectations tumbled. The euro zone economy is sinking deeper into its first recession in the wake of the credit crunch, which slashed financing to companies and households, curbing demand and causing belt-tightening. Germany said manufacturing orders had dropped by a much bigger-than-expected 6.0 percent in November, hit by collapsing demand at home and abroad. Exports had fallen by an unprecedented 10.6 percent in November as demand for cars and others mainstays of the manufacturing economy plummeted. Europe’s biggest economy and the world’s largest exporter posted the biggest monthly drop in exports since reunification in 1990, sending the euro lower against the dollar. The grim economic data is also likely to reinforce expectations of a deep ECB interest rate cut on January 15. Meanwhile unemployment in Spain topped 3 million people for the first time and is expected to worsen in 2009, according to the government. However, the number of U.S. workers filing new claims for unemployment benefits fell unexpectedly by 24,000 last week, government data showed, but the number of people remaining on jobless rolls rose to a fresh 26-year high. The weekly claims data has done little to ease fears that a more comprehensive government report on Friday could show the biggest drop in payroll numbers for 59 years. POLICY RESPONSE RUSH Policy makers worldwide are rushing to try to limit the damage from the biggest global economic crisis since the 1930s. U.S. president-elect Barack Obama will warn that the United States economy may remain mired in recession for years without bold action in a speech on Thursday calling for quick action on a fiscal stimulus package worth around $775 billion (508 billion pounds). “I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible,” he said in excerpts from the speech. The U.S. budget deficit is expected to hit $1.2 trillion in the 2009 financial year. About 8.3 percent of gross domestic product, this would set a new post World War Two record. The leaders of France and Germany called for a complete overhaul of the financial system and French President Nicolas Sarkzoy said the United States should no longer be allowed to dominate the debate. They said new institutions were needed to prevent a repeat of the financial crisis and a fairer form of capitalism that would not lead to imbalances in wealth and the world economy. “Enormous imbalances have appeared … Purely financial capitalism has perverted the logic of capitalism,” Sarkozy said. INVESTOR GLOOM World stocks fell on Thursday after the bleak data and poor corporate earnings fuelled gloom about the economic outlook. “Everyone’s been saying the market has factored in bad economic data and poor results, but now we’re seeing that this wasn’t really true,” said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities in Tokyo. Slumping demand for everything from air travel to clothing and personal computers has also prompted a string of grim company announcements worldwide in the past 24 hours. In addition to U.S. retailers, the warnings have come from Britain’s two biggest employment agencies, Hays and Michael Page, microchip maker Intel, PC firm Lenovo and investment bank Macquarie. Shares in German chipmaker Infineon dropped after a U.S. research firm, iSuppli, said global sales of dynamic random access memory (DRAM) chips are set to fall 4 percent in 2009 — the third straight year of declines. European shoppers are still switching to cheaper goods, despite policymakers efforts to boost consumer spending, resulting in the best ever Christmas for British supermarket group J. Sainsbury

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