Sharpest US GDP decline in 25 years

. 2/28/09

The sharpest contraction in American growth for more than a quarter of a century, a collapse in Japanese factory output and an emergency package of help for the struggling countries in eastern Europe provided fresh grim evidence on Friday of the paralysis in the global economy.

Amid fears that the downturn triggered by the credit crunch has turned into the worst slump in output since the 1930s, data from Washington showed that the havoc wreaked by the problems on Wall Street last autumn was far worse than originally believed.

US gross domestic product in the final three months of 2008 declined at an annual rate of 6.2%, much worse than a 3.8% fall predicted and the worst performance since early 1982.

A breakdown of the data revealed that consumer spending, exports and investment in commercial property were all even lower than originally believed, though the main reason for the downward revision to growth was that the build up of inventories by companies was far less pronounced than originally believed.

Analysts said there had been no let-up in the bad news since the turn of the year and the markets are now braced for payrolls figures next Friday to show that 750,000 jobs were lost in the US during February, with worse to come.

Rob Carnell, economist at ING Financial Markets, said: "Data released so far in the first quarter of 2009 suggest that we are in for another horror story, with new record lows being set in consumer confidence, accelerating declines in the labour market (we may be nearing a million payrolls losses a month before long) and further severe contractions for business investment."

Paul Ashworth of Capital Economics said he did not expect the US economy to begin expanding again until 2010 and even then the recovery would be "muted".

Meanwhile, there was also grim news from the world's second biggest economy, with industrial production dropping 10% between December and January and real household spending 5.9% lower last month than it was in January 2008. Exports from Japan have been severely impaired by the retrenchment in the US and much slower levels of growth in China.

The World Bank, the European Investment Bank and the European Bank for Reconstruction and Development yesterday announced a EUR24.5bn loan programme to help central and eastern Europe, which could become the scene for the next stage of the global crisis.

The three banks said the two-year plan would provide quick, large-scale financing to banks and ensure smaller firms would not be shut off from capital.

The markets - which believe a much bigger package will be necessary - greeted the plan coolly. The Hungarian government will tell an EU summit tomorrow that the money from the World Bank, the EIB and the EBRD needs to be multiplied 10 times for central Europe alone.

Under the development bank plan, the EBRD will provide up to EUR6billion this year and next to the region's financial sector, which will include trade finance through banks.

The EIB said it will lend EUR11billion to businesses in central, eastern and southern Europe, of which EUR5.7billion is ready to be disbursed, and a further EUR2.8billion should be approved by the end of April.

The Washington-based World Bank said it intends to propose lending and political risk guarantees of up to EUR7.5billion for banks, infrastructure projects and trade financing. Its president Robert Zoellick said this week that $120billion could be needed to recapitalise eastern Europe's banking system, which has seen the large sums invested by western banks during the boom years disappear.

"It [the 24.5billion package] sounds like a lot of money, but when [commercial] banks have lent Eastern Europe about $1.7 trillion, 25 billion is peanuts," said Nigel Rendell, emerging markets strategist at Royal Bank of Canada in London.

"Ultimately we will have to get a much bigger package and a coordinated response from the IMF, the European Union and maybe the G7."

Source: The Hindu

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