G7 recession seen intensifying, recovery delayed

LONDON (Reuters) - The recession gripping the developed world likely tightened to a chokehold in the current quarter and it will take longer before pinned-down economies stagger up and recover, Reuters polls showed on Thursday.

Gross domestic product for the world's largest economy now looks set to contract for four consecutive quarters, the longest on record since 1947, heavy collateral damage from the most powerful world financial crisis in 80 years.

That means interest rates are set to plumb even deeper lows, ever-closer to zero in the United States, Japan, and even Britain, which not long ago had the highest borrowing costs in the Group of Seven industrialized nations by a wide margin.

The European Central Bank, which raised interest rates only just five months ago as it fretted about inflation pressure which now is falling at a breathtaking speed around the globe, is also clear-cutting a path down to historic low rates.

Now the growing fear amongst economists and central bankers is that the downturn across the developed world as the financial crisis rages on will be even more severe than the deep slump of the early 1980s -- and perhaps longer.

Reuters polls of more than 100 economists taken Dec 8-11 show dramatic downgrades to consensus expectations just in the past 30 days for the U.S., Japan, the euro zone, and the UK.

"This will be the longest if not the deepest recession in the post-war period," said Scott Anderson at Wells Fargo, echoing a view expressed by several economists about the U.S.

In the fourth quarter alone, U.S. GDP likely plunged a staggering 4.3 percent, annualized, a deep trough the size of which hasn't been carved since the early months of 1982. Just one month ago, the consensus for Q4 was a 3.0 percent drop, last seen in the final months of 1990.

That makes another Federal Reserve interest rate cut next week to 0.50 percent a near-certainty -- a consensus that is even more striking given the aggressive stance the Fed has taken with rates almost since the financial crisis began in 2007.

The poll showed a very high 90 percent probability of zero interest rate policy or quantitative easing in the U.S., mainly because the Fed is already expanded its portfolio buying assets. The poll found a probability of 50 percent for the UK, 40 percent in Japan and just one in four for the euro zone.

GRUEL BRITTANIA?

The speed of Britain's downturn is also intense and has only just started in earnest, leading analysts to conclude there is a grave risk the already-deep 0.8 percent quarter-on-quarter contraction expected for Q4 risks will be worse.

"Prospects for the UK economy are grim, with a fairly severe recession now starting to unfold," said Michael Saunders at Citi.

UK GDP is set to shrink until at least September and barely grow at all in the fourth quarter of next year as a housing market crash already overshadowing the early 1990s claims more victims. The government is set to borrow historic amounts to deaden the blow from soaring unemployment and an ailing financial sector.

For the 15-member euro zone, the consensus for a mild 0.3 percent contraction in the fourth quarter has been downgraded to 0.5 percent and won't see any growth until the last quarter of 2009, one quarter later the November Reuters poll.

That comes despite unprecedented global coordinated interest rate cuts in October, huge followup razings to benchmark rates, gigantic bank rescue packages and the biggest U.S. government infrastructure spending pledge in half a century.

The deterioration in the outlook, along with a collapse in world stock markets that intensified in October, has come so swiftly that now the prices debate is centered around the risk of broadly declining prices across economies.

"As recession and disinflation intensify, and deflation becomes the new debated issue, the ECB should respond with aggressive monetary easing," said Aurelio Maccario, chief euro area economist at UniCredit, who forecast rates going to 1 percent and a risk they go lower.

The latest Reuters consensus is for ECB rates to be slashed to 1.5 percent to try and deaden the blow from a 0.8 percent contraction in GDP for the year.

One year ago, the consensus expectation for ECB rates was 4.0 percent in the middle of 2009. GDP was forecast at 2.1 percent for the year.

Japan, which only emerged from more than a decade of deflation and economic stagnation, looks headed back into familiar territory. Economists have again taken a knife to the growth outlook as the yen has surged and bludgeoned exports.

(Polling by Bangalore Polling Unit, Nigel Davies and Jonathan Cable in London, Pedro Nicolaci da Costa in New York, Yuzo Saeki in Tokyo; Editing by Toby Chopra)