European leaders will propose a new global financial framework on Friday after the International Monetary Fund (IMF) warned the world's richest economies face their first year of contraction since World War Two.
South Korea lowered interest rates by 25 basis points, its third cut in a month, after a deep rate cut by Britain and one by the European Central Bank on Thursday.
Central banks around the world have stopped worrying about inflation and are focusing on trying to prevent the global financial crisis from turning into a deep downturn.
That danger was underlined by the IMF warning that developed economies in 2009 faced their first full-year contraction since the 1940s.
“Increasingly, the signs point to a deep and synchronized global recession that began last quarter and has gathered momentum,” said Bruce Kasman, an economist at JPMorgan Chase in New York.
The IMF cut its 2009 global growth forecast to 2.2% from 3%, a prediction made only last month, and urged governments to boost spending to support their economies.
British Prime Minister Gordon Brown backed the call.
“Coordinated action on interest rates should be complemented by action on fiscal policy,” Brown told reporters.
US President-elect Barack Obama has proposed a stimulus package that some experts estimate could cost up to $190 billion. Germany has approved measures designed to give its economy a €50 billion ($64 billion) boost.
EU heads of government were to meet in Brussels on Friday to discuss Europe's proposals ahead of the Nov.14-15 summit of global powers on a financial crisis which has its origins in the collapse of the US housing market.
The Europeans want the Washington summit to herald root-and-branch change. US President George W. Bush's outgoing administration has taken a more cautious stance.
“We expect Washington to produce a clear time schedule, a clear mandate ...We know that the readiness to overhaul the international financial architecture will diminish as countries begin to feel better,” a German government official said.
Their proposals include better risk management in the financial industry, closer supervision of credit rating agencies and hedge funds and reinforcing the role of the IMF as the rescue agency for troubled countries.
Also on Friday, Obama is due to hold his first news conference since winning the US presidency after a meeting with his economic team, as the world awaits signs of how he might tackle the economic crisis.
Markets are particularly keen to learn who will become Obama's Treasury secretary, but it was not clear when he might announce his choice.
Among those seen as leading candidates for the job are Timothy Geithner, president of the Federal Reserve Bank of New York; former Treasury Secretary Lawrence Summers; and former Federal Reserve Board Chairman Paul Volcker.
Investors also looked anxiously ahead to Friday's US jobs payroll report for October, which is expected to underscore the weakening economy.
According to the median of a Reuters forecast of 87 economists, another 200,000 non-farm jobs were shed last month, which would be the largest monthly cut in jobs since March 2003.
Governments around the world have pumped trillions of dollars into saving a banking system poisoned by the spread of bad debts or “toxic” loans.
The crisis is now hurting a growing number of businesses as consumers, worried about their own debts, curb spending and companies find it harder to access funds.
Investors were bracing for dismal quarterly results from General Motors and Ford on Friday, and industry sources said their chief executives sought a $50 billion federal bailout to survive a crunch blamed on a worsening economy and the “near collapse” in demand for cars. In Asia, shares in the world's biggest automaker, Toyota, fell as much as 12% after it slashed its profit forecast.
Air travel is also suffering as companies cut costs.
British Airways Plc said October passenger numbers fell 4.4% compared to the same month last year, but this included a 9% fall in business travel - the main source for BA profits.
“We expect the rescue packages of governments for the banking system, global rate cuts by central banks and the latest recovery of share prices to have at least trimmed fears,” said Ralph Solveen, an economist at Commerzbank in Frankfurt. (Reuters)