China pitched in nearly $600 billion to the global effort to avoid the worst economic downturn in decades, while grim Japanese data on Monday offered more proof of the damage caused by the global financial crisis.
With mounting evidence that the United States, Japan, the euro area, Britain and other developed nations are in recession, investors and leaders have looked to China to do its bit in propping up a faltering global economy. The world’s fourth-largest economy is still expanding at a healthy rate and is one of few nations that can still afford fiscal pump-priming, although growth has slowed markedly from heady double-digit rates seen in the past six years.
Beijing announced on Sunday plans to re-engineer growth shifting the economy’s focus away from struggling export markets to the domestic economy, promising to spend CNY 4 trillion ($586 billion) on infrastructure and social services. It also flagged a shift to a “moderately easy" monetary policy, possibly heralding further reductions in borrowing costs after three cuts since mid-September. “This is clearly another significant step toward combating global economic risks,” Goldman Sachs economist Yu Sing said. The news buoyed Asian stock markets and drove commodity prices higher, with Tokyo shares gaining more than 5% and markets elsewhere in Asia up more than 2%.
China’s move coincided with a meeting of officials from the world’s 20 major economies, who pledged to act to contain the fallout from the credit crisis triggered by the downturn in the US housing market 15 months ago. The G20 meeting in Sao Paolo produced assurances that there would be no let-up in efforts to pull the world economy out from the doldrums, but specific action would more likely come from a crisis summit of world leaders on November 15 in Washington. China’s stimulus plan comes on top of more than $4 trillion in bank bailouts, credit guarantees and fiscal spending pledged by governments around the world to contain the damage from the worst financial turmoil since the 1930s Great Depression.
In a reminder of how quickly the disease caused by toxic debt linked to US mortgages spread beyond the financial industry to other businesses and consumers, Japanese manufacturers suffered their biggest quarterly slump in machinery orders in a decade. Washington was hard at work, revamping a government bailout of AIG that would bring the insurer under the umbrella of the $700 billion financial rescue package.
Fitch cut its ratings for several Eastern European states, including Romania and Hungary, and lowered outlooks on major emerging economies from South Korea and Mexico to Russia. The move underscores how no country is immune to the global turmoil and those with weak spots such as high current account deficits and reliant on short-term borrowing are particularly at risk. The Japanese data followed Friday’s US jobs report, which showed unemployment in the world’s biggest economy at a 14-year high, and coincided with a cut in Australia’s central bank’s growth forecasts.
The Reserve Bank of Australia cut its outlook for this year and next for the economy that had long been sheltered from the global turmoil by Chinese demand for its commodities. But with Chinese industry shifting down because of a slump in export markets, some of Australia’s top producers have been forced to scale back output and investment plans. On Monday, mining giant Rio Tinto announced a 10% cut in iron ore shipments.
MORE RATE CUTS
Australia’s dimmer outlook cemented expectations of more interest rate cuts after a hefty 200 basis points of easing in two months, in line with worldwide bets that borrowing costs will slide further.
European Central Bank President Jean-Claude Trichet told Brazilian television on Monday that another cut in the ECB’s benchmark rate was “possible” after last week’s half point cut. According to Goldman Sachs calculations, the world’s 10 major economies, with the exception of Japan, cut rates by an average 190 basis points from their peaks, and interest rate markets are discounting total easing of over 3 percentage points.
ECB Governing Council Member Mario Draghi warned, however, rate cuts were not a cure-all and aggressive easing not backed by government fiscal measures could leave world markets with too much cash further down the road. But Trichet offered a sobering reminder that many countries, including several European nations, just lacked ammunition to spend their way out of the slump. “They have already now deficits which are very substantial and for them the room for maneuvering does not exist,” he said.
In the United States, the budget is already creaking under the burden of the Iraq war and the $700 billion earmarked for bank bailouts, putting president-elect Barack Obama under pressure to top it up with hundreds of billions of dollars in a fiscal stimulus package. (Reuters)