NEW YORK/LONDON (Reuters) - The global economy extended its grim run on Tuesday, as U.S. house prices posted a record plunge and German business confidence hit its lowest since reunification, while President Barack Obama prepared to explain his plan for getting out of the current rut.
Adding to the gloom, U.S. consumer confidence plunged to another record low in February with expectations that already dire economic conditions will continue to weaken and the jobs market will further deteriorate.
“Confidence is deeply, deeply mired in recessionary territory, resulting in big declines in real consumer spending,” said Steven Wood, chief economist at Insight Economics in Danville, California.
The weakest German business confidence since 1990 followed overnight reports that American insurer AIG (AIG.N) could make the biggest quarterly loss in corporate history.
U.S. Federal Reserve Chairman Ben Bernanke said the world’s largest economy was in a “severe contraction” and warned that unless government efforts succeed in restoring financial stability, the nation’s recession may not end this year.
More than two years after the U.S. property bubble began to implode, prices of U.S. single-family homes plunged 18.5 percent in December from a year earlier, the latest in a series of record declines, according to a Standard & Poor’s/Case-Shiller home price index.
On Wall Street, shares actually managed to rebound after falling to 12-year lows a day earlier.
Monday’s rout on Wall Street had come even as Washington vowed to prop up ailing banks. Sources familiar with the matter said the U.S. government was discussing taking a bigger stake in shrinking financial giant Citigroup (C.N), and injecting more cash into AIG.
As the global financial crisis plumbs new depths, AIG is asking for a third round of government aid and bracing for a fourth-quarter loss of about $60 billion, one of the sources said, more than double its $24.5 billion third-quarter loss.
American International Group said in a statement it had not yet reported results and would provide an update when it does so in the near future.
But riding high in opinion polls, Obama will deliver a State of the Union-style address at 9 p.m. EST (0200 GMT on Wednesday) in his first appearance before a joint session of Congress since he took office five weeks ago.
The Conference Board, an industry group, said its U.S. consumer sentiment index fell to 25.0 from a downwardly revised 37.4 in January. The February reading was a new all time low for the index, which began in 1967.
News that the key Ifo index of German business sentiment unexpectedly slipped in February to the lowest level since reunification in 1990 dented optimism that the economy there had reached a bottom.
The Reuters consensus had been for no change in the Ifo business climate index, but it fell to 82.6 in February from 83.0 in January. The expectations index rose slightly to 80.9 from 79.5, still looking for a glimmer of light ahead.
“The next few months will be brutal,” said Andreas Rees at UniCredit. “The recession will hit with its full force. But the economic stimulus measures should then start to help stabilize
News of a hefty 5.2 percent fall in euro zone industrial orders in December also soured sentiment, as did official figures showing business investment in Britain fell by its biggest amount since 1991.
There were some bright spots in the gloom. A private sector survey showed UK retail sales fell at a much slower pace than expected in February, while French consumer spending unexpectedly rose, as did Italian consumer sentiment.
European shares took another beating on Tuesday.
The Nikkei mostly shrugged off a comment from Japan’s finance minister that the government was studying measures to support the stock market, just as the Nikkei touched 7,155 — not far from the 26-year low below 7,000 struck in October.
Government bonds rose, pushing yields lower, and the dollar fell against a basket of six major currencies, though it hit a three-month high against the yen.
The United States government vowed on Monday to spend more money to prop up ailing banks, if needed, even as President Barack Obama pledged to cut the ballooning U.S. budget deficit in half in the next four years.
Obama, who is rolling out his first budget on Thursday, stressed the need to act quickly, emphasizing he inherited a $1.3 trillion deficit, with interest payments alone in 2008 costing three times the amount spent on education.
Reporting by Reuters bureau worldwide; Writing by Ross Finley and Burton Frierson