European pessimism grows; U.S. jobs, retail slump

NEW YORK/LONDON (Reuters) - Economic weakness in Europe worsened and U.S. jobless rolls swelled as disappointing sales from Wal-Mart, the world's largest retailer, and other retailers on Thursday showed that consumers are still wary about opening up their pocketbooks in an uncertain economy.

The Bank of England, which cut its key interest rate to a historic low of 1.5 percent, said the world economy appeared to be undergoing an unusually sharp and synchronized downturn.

"Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time," the British central bank said in a statement.

U.S. unemployment benefit rolls climbed to a 26-year high in the last week of December, with 4.61 million people in the world's largest economy drawing aid, up 101,000, and well above forecasts for a total of 4.5 million.

Still, the number of U.S. workers filing new claims for unemployment benefits showed an unexpected decline of 24,000 from the previous week, government data showed. The weekly claims data did little, however, to ease fears that a more comprehensive government report on Friday could show the biggest drop in payroll numbers in 59 years.

Wal-Mart Stores Inc, posted weak December same-store sales and cut its quarterly earnings forecast as other U.S. retailers also warned that earnings would be worse than expected in the current quarter, which includes the key 2008 holiday shopping season.

The Federal Reserve confirmed that U.S. households, the engine of the nation's economy, have pulled back on spending, with consumer borrowing dropping by a record $7.94 billion in November, or 3.7 percent.

"The message is the weak economy is hurting the job market and that will affect consumer spending going forward. There is a serious snowballing process underway," said Pierre Ellis, senior global economist at Decision Economics in New York.

The European Commission earlier said that economic sentiment in the 15 countries using the euro plunged to an all-time low in December as unemployment rose and inflation expectations tumbled.

The euro zone economy is sinking deeper into its first recession, the victim of a credit crunch that slashed financing to companies and households, curbing demand and causing belt-tightening.

Policymakers worldwide are rushing to limit the damage from the economic crisis, the biggest since the 1930s.

U.S. President-elect Barack Obama warned that the United States' economy could be mired in recession for years without bold action and called for the U.S. Congress to work "day and night" to quickly pass a fiscal stimulus package that could total nearly $800 billion.

"I don't believe it's too late to change course, but it will be if we don't take dramatic action as soon as possible," he said in a speech in suburban Washington.

GERMAN DATA BLEAK

Germany said manufacturing orders dropped by a much bigger-than-expected 6 percent in November, hit by collapsing demand at home and abroad. Exports fell by an unprecedented 10.6 percent in November as demand for cars and others mainstays of the manufacturing economy plummeted.

Europe's biggest economy and the world's largest exporter posted the biggest monthly drop in exports since reunification in 1990, sending the euro lower against the dollar.

The grim economic data reinforced expectations of a deep interest-rate cut by the European Central bank on January 15.

In Spain, unemployment topped 3 million people for the first time and is expected to worsen in 2009, according to the government.

The leaders of France and Germany called for a complete overhaul of the financial system and French President Nicolas Sarkozy said the United States should no longer be allowed to dominate the debate.

They said new institutions are needed to prevent a repeat of the financial crisis and make possible a fairer form of capitalism that does not lead to imbalances in wealth and the world economy.

"Enormous imbalances have appeared ... Purely financial capitalism has perverted the logic of capitalism," Sarkozy said.

WEAK MARKETS

U.S. shares extended their selloff from Wednesday, with the Dow Jones Industrials shedding 0.3 percent, while Britain's FTSE 100 index fell only modestly. Both declines were far smaller than the 3.9 percent slide in Japan's Nikkei 225 index.

"Everyone's been saying the market has factored in bad economic data and poor results, but now we're seeing that this wasn't really true," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities in Tokyo.

Slumping demand for everything from air travel to clothing and personal computers has also prompted a string of grim company announcements worldwide in the past 24 hours.

In addition to U.S. retailers, warnings have come from Britain's two biggest employment agencies, Hays and Michael Page, microchip maker Intel Corp, PC firm Lenovo and investment bank Macquarie.

(Reporting by Reuters bureaus worldwide; editing by Philippa Fletcher, Steve Orlofsky and Bernard Orr)