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"Harsh storm" threatens global economy
October 30, 2008 / 12:22 AM / 9 years ago

"Harsh storm" threatens global economy

<p>A woman walks past signs reading "going out of business sale" posted outside an electronic store in Tokyo October 30, 2008. REUTERS/Yuriko Nakao</p>

NEW YORK (Reuters) - The U.S. economy contracted in the third quarter as the financial crisis raged, while Japan and Germany said they would spend billions of dollars to provide a cushion against a deep global recession.

The spending measures would complement a series of interest rates cuts, including those from China, Norway and the United States on Wednesday.

Japan may cut rates on Friday and the European Central Bank, Britain and Australia are expected to follow next week, coming on the heels of data that showed a rapid deterioration in major economies.

“A harsh storm seen only once in 100 years is raging,” Japanese Prime Minister Taro Aso told a news conference.

The president of the San Francisco Federal Reserve Bank, Janet Yellen, called recent trends in the U.S. economy “deeply worrisome.”

The first Fed official to speak after Thursday’s news that the U.S. economy contracted in the third quarter, Yellen said the U.S. federal funds rate could potentially go “a little lower” than 1 percent, one day after the Fed cut its benchmark lending rate by a half percentage point.

“The mortgage meltdown is far from over, the economy and financial markets are still reeling from it,” she said.

The world’s largest economy shrank at a 0.3 percent annual rate in the third quarter, the sharpest contraction in the United States in seven years. U.S. consumers slashed spending at the sharpest rate in 28 years in the third quarter, undermining growth.


The economy also suffered in the third quarter as businesses cut investment. More companies announced payroll cuts on Thursday. Credit card issuer American Express Co said it would chop 7,000 jobs, while cellular phone maker Motorola Inc said it would lay off 3,000 workers.

However, the data on the gross domestic product was not as bad as many had feared, which along with the global rate cuts and signs of a thaw in credit markets helped push U.S. stocks up about 2 percent.

The gains brought stability to a market that had fallen to 5-1/2-year lows this month, ravaged by the credit turmoil. U.S. stocks are still down about 15 percent just this month.

European shares lost much of their earlier gains but still closed higher.

Japan’s benchmark Nikkei average index closed up 10 percent, a third straight day of gains that have lifted the index 26 percent. However, like most markets in the world, the Nikkei remains down more than 40 percent this year.

Even as the markets edged higher, there remained some big pockets of weakness, including insurance, which has been discussed as a possible recipient for U.S. bailout funds.

Hartford Financial Services Group Inc shares lost more than half their value, sinking to an all-time low, a day after the company had what its chief executive described as the worst quarter in its 198-year history, stoking concern it may need to raise even more capital.

“What we see is the world getting much worse,” Lazard Ltd Chief Executive Bruce Wasserstein said in an interview with Fortune Magazine that was open to the media. “The financial system has a long way to go” before rebounding, the legendary dealmaker said.


<p>Japanese Prime Minister Taro Aso speaks during a news conference at his official residence in Tokyo October 30, 2008. REUTERS/Yuriko Nakao</p>

As U.S. banks began announcing the terms under which the government had injected billions of dollars in capital into them, they reiterated pleas to the U.S. Treasury Department to clarify whether participating in the $250 billion program would force them to cut executive pay or bar them from paying dividends.

Still, encouraging news emerged from the banking sector. Closely watched rates on bank-to-bank borrowing fell on Thursday, helped by the U.S. Federal Reserve’s rate cut on Wednesday and currency swap lines to ease a scramble for dollars around the world.

Also, the supply of U.S. commercial paper rose on Wednesday, signaling a Federal Reserve program to buy the securities appears to have revived this crucial part of the credit market.

U.S. banks’ direct borrowing from the Federal Reserve decreased last week but remained at very high levels, even as the central bank made loans directly to businesses for the first time ever.

There have been fewer positive signs for the auto industry, and a lobby group for top U.S. chief executives said the Treasury should use some of the funds from the bailout legislation to provide direct capital injections to automakers and their finance companies.

But a Bush administration official said the Treasury Department was not negotiating with General Motors Corp and the owners of Chrysler LLC on a request to provide direct government aid to their proposed merger.

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The U.S. GDP data came five days before the U.S. presidential election and candidates seized on the report as a chance to take swipes at their rival’s plans.

Democratic nominee Barack Obama called the contracting economy “a direct result” of Bush administration policies that he said Republican nominee “John McCain has embraced for the last eight years and plans to continue for the next four.”

The McCain camp fired back that “Barack Obama would accelerate this dangerous course. ... John McCain offers a new direction and a real choice.”


Japan, the world’s second biggest economy, unveiled a 5 trillion yen ($51 billion) package of spending measures to support its economy.

“I am certain that what is most important is to remove uncertainties from the lives of people,” said Japan’s prime minister.

Germany planned to introduce a range of steps worth up to about 30 billion euros ($39.17 billion) to boost investment in Europe’s biggest economy.

The package will include support for car makers and building renovation as well as tax breaks enabling companies to write off a share of their investments, German newspapers reported.

Governments are desperate to put measures in place to protect their economies against recession, which euro-zone statistics suggested has hit much of Europe.

Economic sentiment in the 15-nation currency bloc plunged to its lowest level since 1993 in October, official data showed.

Brazil’s top economic officials said the global financial crisis will not push the country into a recession and that the central bank would unveil a new lending facility for exporters suffering from a credit crunch.

Poor corporate earnings and forecasts for 2009 from companies from Eastman Kodak Co to British advertising firm WPP Group to Japanese automaker Mitsubishi Motors Corp supported the view that the downturn would be long-lasting.

Reporting by Reuters bureaus worldwide; Editing by Leslie Adler

Our Standards:The Thomson Reuters Trust Principles.
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