America joins UK on brink of recession
America joins UK on brink of recession
Fed expected to lower interest rates to 1 per cent
Heather Stewart and Richard Wachman The Observer,
Sunday October 26 2008
Federal reserve chairman Ben Bernanke is poised to slash American interest rates to just 1 per cent this week, the lowest level since the depths of the dotcom crash, as government figures reveal the US has joined Britain on the cusp of recession.
World investors were focused on Britain last week after Bank of England governor Mervyn King and Prime Minister Gordon Brown confirmed recession was looming, and it emerged that the economy had shrunk by a worse-than-expected 0.5 per cent in the third quarter of the year. But all eyes will now turn to the US, as the Fed meets to set borrowing costs and government figures reveal the full scale of the deterioration in the economy over the past three months.
The White House bought a short-lived economic boost in the second quarter of 2008 by sending out $150bn in tax rebate cheques to voters and businesses. But the money was quickly spent, and analysts believe the economy then declined rapidly even before the global financial system was pushed to the brink by the Lehman Brothers bankruptcy last month.
Robert DiClemente of Citigroup predicted that the Fed would take 'bold action' in the face of 'rapidly accumulating signs that recession was intensifying before the latest shockwave'.
The Fed joined in with the internationally co-ordinated half-point rate cut earlier this month, taking borrowing costs to 1.5 per cent, but is nevertheless widely expected to deliver another reduction on Wednesday.
Paul Ashworth, senior US economist at consultancy Capital Economics, warned that GDP now looked likely to contract continuously until at least late 2009. 'Everyone's coming to the realisation that the impact on the real economy is going to be pretty hard and pretty heavy,' he said.
Bernanke has been handed more room to manoeuvre by the sharp decline in oil prices since the summer. Despite a decision by Opec ministers to cut production by 1.5 million barrels a day last week, the cost of crude continued to fall, dropping by 5 per cent on Friday alone. Brent crude closed at below $62 a barrel.
Wall Street suffered another nerve-shredding week, as investors fretted that the spreading worldwide slowdown would hit companies far beyond the banking sector. The Dow Jones closed down 312 points on Friday night.
Puneet Sharma, head of European strategy at Barclays Capital, said: 'Emerging market economies are in retreat; Western multinationals, which have enjoyed strong earnings as a consequence of their exuberance, will be adversely affected in the months ahead. It is finally getting through to people.'
Aerospace, engineering, chemicals, automotive and luxury goods firms now appear likely to be hit in a way that shareholders thought inconceivable even a couple of months ago, when the prevailing belief was that fast-growing countries such as China and India would cushion the world from recession.
'What's going on in the stock markets is a reflection of the fact that investors are realising non-financial profits are going to be absolutely whacked,' said Ashworth.
http://www.guardian.co.uk/business/2008 ... -recession
