No relief seen in global crisis

The Straits Times
Nov 21, 2008 | 7:19 AM
No relief seen in global crisis
- White House could back auto industry rescue plan
- IMF helps Iceland, Turkey
- Economists, Fed see recession well into 2009
- Oil falls below US$50 on reduced demand
- Deflation feared

WASHINGTON - THE global economy saw more signs of distress on Thursday with US stocks plunging for a second consecutive day, oil prices falling, a surprise rate cut in Switzerland, export woes in Japan and rescue loans to Turkey and Iceland.

Wall Street was hostage to the rapidly changing news of a possible rescue for the US auto industry, with the stock market rising on news of a tentative bipartisan deal in Congress for a US$25 billion (S$38 billion) package for Detroit and then falling to new lows when the deal ran into trouble.

Automakers held out hope. After the end of the trading day, the White House announced it could back a compromise plan pushed by Michigan senators to help by using US$25 billion in Energy Department loans for greener cars, and urged Congress to act quickly. US automakers said they will meet Democratic demands to offer a plan to return to profitability, and lawmakers said it could be considered the week of Dec 8.

In more bad news for the battered US economy, the number of US workers on jobless rolls surged to the highest in a quarter century, prompting Congress to extend benefits for the long-term unemployed.

Oil prices plummeted below US$50 a barrel for the first time since 2005 as investors anticipate a long global recession will slash demand.

'I think this is going to be not only a deep recession, at least in the next couple of quarters, but also a long recession,' said Mr Conrad DeQuadros, senior economist at RDQ Economics in New York.

All three major US stock indices made broad swings, ending lower due to deepening economic fears and investor's movement away from risk. The Standard & Poor's 500 was down more than 6.71 per cent, its lowest since 1997. The Dow Jones industrial average slid nearly six per cent to close just above 7,500 and the Nasdaq Composite Index fell more than five per cent.

World stocks tumbled to 5-1/2-year lows with volatile emerging market equities down 4.71 per cent. European shares closed down 3.7 and Japanese stocks plunged nearly 7 per cent.

Investors sought shelter in safe assets, and the US dollar slumped versus the yen, but both rose against the euro.

The rapidly slowing world economy prompted Switzerland's central bank to make a surprise one percentage-point interest rate cut, its third in six weeks and largest since it adopted its current system in 2000.

Analysts said the weak US labour market almost guaranteed a Federal Reserve Board rate cut from the current 1 per cent at its next meeting on Dec 15-16.

Despite reports that Saudi Prince Alwaleed bin Talal planned to boost his stake in Citigroup back to 5 per cent, shares in the US financial giant fell 26 per cent to 1994 levels due to serious concern over its very survival.

'How many times is one going to take a beating before realising the market isn't going to bounce?' said Mr Andrew Kanaly, chairman of Kanaly Trust Company in Houston, Texas. 'The decline in the oil prices is a barometer of more economic sliding globally.'

In what would normally be a good sign for consumers but now signals weaker global growth, US crude futures plunged nearly 9 per cent to US$48.85 a barrel to a 3-1/2 year low on expectations that a stalling economy would mean falling demand.

Job losses, long downturn
A government report showed the number of workers filing new claims for jobless benefits last week surged to the highest in 16 years. More than 4 million Americans were receiving jobless benefits in the week ended Nov 8, the highest since 1982.

Leading economies will likely be in recession for around a year, a Reuters poll of around 250 economists showed. The survey across the Group of Seven nations showed economies faced recession for as much as five quarters.

'All developed economies will contract in 2009. It's the worst we have had in a century. But to say it's going to look like 1929 again for all these economies is a bit excessive, it's too pessimistic,' said Mr Marco Annunziata, chief economist at UniCredit in London.

The Federal Reserve said on Wednesday the US economy would contract through the first half of 2009.

'No end in sight,' ING economists said in a note on Thursday, a sentiment widely shared by investors.

Analysts said now the fear may be for a deadly economic problem: deflation, marked by steadily falling prices and economic stagnation.

'Once you get into a period of deflation, it's important to get the economy turned around as soon as possible,' said Mr Lyle Gramley, a former Fed governor who is now an analyst with the Stanford Group in Washington.

The Philadelphia Federal Reserve said in its monthly business survey that the prices paid component fell to its lowest level since the survey started in 1968.

Japan's exports to Asia fell in October for the first time since 2002, suggesting the fallout from the credit crisis has spread to neighbors such as China.

IMF to the rescue?
With investors looking increasingly to governments and other authorities to stop the rot, the IMF moved to prop up both Iceland and Turkey. It approved a US$2.1 billion loan for Iceland, battered by a severe banking crisis, as part of a US$10.2 billion package.

Sources in Turkey told Reuters the IMF was ready to agree a precautionary standby agreement of US$20 billion to US$40 billion.

Russia's Prime Minister Vladimir Putin said his country would not allow the global financial crisis to capsize its economy and announced a US$20 billion stimulus package and help for people who lose out in the downturn. -- REUTERS