The US economy has been in a recession for a year, the nation’s business cycle arbiter declared on Monday, while European leaders vowed to step up public spending to try to cushion a deepening downturn.
Economic data showed factories were slashing output in the United States, Europe and China last month as demand dropped, boosting expectations that central banks around the world will keep lowering short-term interest rates in the coming weeks. US Federal Reserve Chairman Ben Bernanke said further interest rate cuts were “certainly feasible” and cautioned that the economy would probably remain weak for a while.
The Bank of Japan called an emergency meeting for Tuesday to find ways to cut corporate borrowing costs. BOJ Governor Masaaki Shirakawa warned that access to funding was becoming increasingly tough for Japanese firms, to an extent comparable to a debilitating credit crunch a decade ago. In a sign of how drastically the deepening economic gloom was curbing demand, US manufacturing in November fell to its weakest in 26 years. A similar reading on euro zone factories sank to a record low.
China’s manufacturing sector also slumped in November as new orders tumbled, showing the world’s fourth-largest economy was being sucked deeper into the global maelstrom. “Miserable readings from other manufacturing indexes around the world today -- in China and throughout Europe -- emphasize the depth of the global downturn,” said Nigel Gault, chief US economist at IHS Global Insight.
The financial crisis that began with a US housing market collapse last year has already knocked most of Europe and Japan into recession, and the United States officially joined the club on Monday. The National Bureau of Economic Research, a prestigious private research group whose business cycle dating committee is considered the official arbiter of recessions, declared that the US recession began in December 2007. The current downturn, which many economists expect to persist through the middle of next year, is already the third-longest since the Great Depression.
OPENING THE VAULTS
Euro-zone finance ministers gathered in Brussels to flesh out the European Commission’s €200 billion plan to revive their economies. But Germany bristled at suggestions that it needed to spend more. The Commission proposed last week that European Union countries spend an extra 1.2% of GDP from their budgets, mainly in 2009, to boost investment and consumer demand. “We all agree that monetary policy cannot provide an adequate response to the crisis so we need to provide a strong fiscal response,” Eurogroup Chairman Jean-Claude Juncker said. “We shall place great emphasis on public investment insofar as the plans are ready, they can be brought forward,” he said.
Earlier on Monday, German Chancellor Angela Merkel told her party that the government, which has unveiled a €32 billion plan, would not go on a spending spree to please its neighbors. “We will not take part in a competition to outdo one another with an endless list of new proposals, in a senseless contest over billions,” Merkel said.
French President Nicolas Sarkozy criticized Merkel’s lukewarm reaction last week, saying: “While France is working, Germany is thinking.” US lawmakers were considering a $500 billion spending package to present to President-elect Barack Obama after he takes office in January, and several leading Democrats said Monday’s recession designation underscored how urgently the additional spending was needed.
Stocks slid, with investors caught between aggressive steps by central banks and ever-weaker economic data. Major US stock indexes dropped around 8%, while Europe’s FTSEurofirst 300 shed 6%. Fed Chairman Bernanke, in a speech to the Greater Austin Chamber of Commerce, said the central bank had room to reduce its benchmark interest rate further even though it stands at a low 1%. But he added that the Fed would also consider other ways of stimulating the economy.
“Even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time,” Bernanke said. “Going forward, our nation’s economic policy must vigorously address the substantial risks to financial stability and economic growth that we face,” he added.
Central banks in Britain, the euro zone, Australia and New Zealand are expected to cut borrowing costs sharply this week in response to the crisis. Inflation in Thailand, South Korea and Australia plunged in November in sync with a global retreat, giving central banks room to slash interest rates further to soften the blow from the worst financial crisis since the 1930s.
Expectations of more rate cuts in Britain were underlined by the UK’s PMI index showing manufacturing shrank at a record pace in November after a collapse in new orders. Australia’s central bank is expected to slash its benchmark rate by at least 75 basis points on Tuesday, on top of 200 basis points of cuts since early September. The European Central Bank and Bank of England deliver their verdicts on Thursday.
Hopes that consumers may ride to the rescue appeared to be optimistic. US post-Thanksgiving sales, which mark the traditional start to the holiday shopping season, looked less dire than feared but that did not stop investors from dumping shares of retailers. Analysts warned that while stores were crowded, the sales growth may have come at the expense of profits and overall demand remained weak. “Regardless of retail sales, retail profits are another matter. Everything they sold was at a razor-thin margin,” said Ellen Davis of the National Retail Federation.
Auto makers in Sweden, France, Spain, Japan and South Korea all reported tumbling sales, taking fresh hits from plunging consumer confidence on the world’s car lots. German retail sales rose slightly in October but with unemployment expected to rise, the outlook is cloudy. Sales, including turnover at gas stations and of cars, rose 0.4%, Bundesbank data showed. A narrower measure showed a decline of 1.6% on the month. (Reuters)