World Recession Nears as European, Asian Companies Fire Workers
Nov. 21 (Bloomberg) — The world economy slipped closer to recession as companies in Europe and Asia joined their U.S. counterparts in cutting production and jobs, intensifying pressure on central banks to push interest rates to zero.
Manufacturing and service industries in the euro area contracted at the fastest pace in at least a decade this month. Japan and Singapore said they’re more pessimistic about growth prospects. Hours earlier, Toyota Motor Corp., Asia’s biggest carmaker, said it would cut its Japanese temporary workforce by 50 percent.
The worst global economic slump in at least three decades has got central bankers and politicians racing to respond with lending-rate cuts and spending packages. More aggressive and unconventional measures may be needed to avert deflation.
“Things are getting worse a lot quicker than expected and the downturn will be even bigger,” said Zahra Ward-Murphy, a global economist at Dresdner Kleinwort in London. “Even with expectations for weaker growth there’s been further surprises to the downside.”
The International Monetary Fund predicted two weeks ago that advanced economies would contract next year for the first time since World War II. Goldman Sachs Group Inc. today said the U.S. recession would be deeper than it had previously predicted, with gross domestic product likely to decline at an annualized rate of 5 percent in the current quarter and the unemployment rate reaching 9 percent by the end of 2009 from 6.5 percent last month.
More Rate Cuts
The European Central Bank may need to step up the pace of interest-rate cuts after Royal Bank of Scotland Group Plc’s composite index of manufacturing and service industries fell to 39.7, the lowest since the survey of purchasing managers began in 1998, economists said. Separately, French consumer spending on manufactured goods slipped the most in four months in October.
Germany’s BASF SE, the world’s largest chemical company, this week lowered its profit forecast for the second time and said it plans to idle 80 factories after customers reduced orders.
“The ECB remains well behind the curve,” said Jacques Cailloux, RBS’s chief euro-area economist who predicts the 15- nation region will suffer its worst recession in a half-century next year. “A large cut in December looks warranted.”
The Frankfurt-based central bank now has the highest interest rate among its Group of Seven counterparts even after cutting it a percentage point to 3.25 percent. Unlike counterparts in the U.K. and U.S., it has limited its cuts to half-point shifts. The Swiss National Central Bank yesterday axed its benchmark rate by an unprecedented 1 percentage point.
Investors now bet the ECB will lower rates at least 75 basis points at its next policy meeting on Dec. 4, Eonia forward contracts show. It would be the largest interest-rate move by the central bank since it was created 10 years ago. Citigroup Inc. economist Juergen Michels said in a report to clients today that the ECB will cut the benchmark rate to 1 percent next year and may consider moving it to zero as the region’s recession worsens.
ECB council member Axel Weber said today the economic outlook is worsening “rapidly,” giving the bank more room to cut rates further. Even so, colleague Yves Mersch said in an interview with Dow Jones conducted Nov. 18 that such a move would hurt “confidence” and Austria’s Ewald Nowotny told Market News International that the ECB wants to preserve “firing power.”
The 27 governments that form the European Union are now crafting a coordinated economic stimulus package, which German officials have said would be worth about 130 billion euros. The U.K. government is suggesting it will unveil tax cuts next week.
U.K. Housing Slump
In the U.K., home repossessions by mortgage lenders rose 12 percent in the third quarter and automobile production fell to its lowest level for October since 1991. Almost one in four U.K. manufacturers have frozen or deferred wage settlements to curb costs, a survey by the EEF trade association showed.
Britain’s interest rate — now 3 percent — must fall to the U.S. level of 1 percent if the country is to avoid a “liquidity trap” in which banks and households hoard cash rather than lending or spending, David Smith, the chief executive of Tata Motors Ltd.‘s Jaguar Land Rover, wrote in the Financial Times today.
While the Bank of Japan today left its key rate at 0.3 percent, the lowest among the G-7 nations, it said it will consider pumping more money into the financial system after its economy fell into recession last quarter. Still, Governor Masaaki Shirakawa said he’s mindful that lowering interest rates further may impair the functioning of money markets. The Japanese government cut its evaluation of the economy for a second straight month.
Toyota will reduce its domestic temporary workforce by 50 percent to 3,000 by the end of March, spokesman Paul Nolasco said today. The automaker follows Mazda Motor Corp. and Isuzu Motors Ltd., which yesterday said they would slash a combined 2,700 temporary jobs in Japan in response to slowing sales.
With Japan a major consumer of exports from its neighboring economies, Singapore’s government lowered its growth forecast for a fourth time this year and said the economy may contract in 2009. Indian shipments abroad fell for the first time in seven years in October and officials are considering an aid package for exporters.
“Downturn is deepening across the region,” said Robert Subbaraman, an economist at Nomura International (HK) Ltd.
The growing concern of investors is that as the world economy slumps, commodity and asset prices will be dragged down and companies and consumers will stockpile even more cash, resulting in a bout of deflation or prolonged decline in prices.
In a report published yesterday, Dario Perkins, a London- based economist at ABN Amro Holding NV, said Japan, Germany and the U.S. are the most vulnerable to deflation within the G-7. “Markets are worried about deflation becoming more persistent.”