LONDON // Global economic misery spread on Thursday with the Federal Reserve predicting US recession well into next year, Japan's exports to Asia falling for the first time in six years and another sharp sell-off on global equity markets. The International Monetary Fund (IMF) stepped in to bail out troubled Iceland, leading a US$10.2 billion (Dh36.7bn) help package, and was set to make as much as $40bn available to Turkey.
The deepening global recession was also eating into company outlooks. Prospects for a US bailout of its automakers faded and General Motors underlined its troubles by announcing a two-month production shut down in Thailand. In Britain, the downturn was symbolized by iconic high street retailer Woolworths being in sale talks, while competitors began offering steep, early discounts to get a boost from what may well be a poor Christmas season.
In France, carmaker PSA Peugeot Citroen said it would cut 2,700 jobs. World stocks tumbled 2 per cent to a 5-1/2 year low with volatile emerging market equities down nearly 4.5 per cent. European shares lost 3 per cent and Japanese stocks plunged 7 per cent. The moves followed heavy losses on Wall Street overnight. The US Federal Reserve set much of the tone on Wednesday, forecasting that the economy would contract through the first half of next year.
"No end in sight," ING economists said in a note on Thursday, a sentiment widely shared by investors. Japan's exports to Asia fell in October for the first time since 2002, suggesting that the fallout from the credit crisis has spread to neighbors such as China. Shipments to Asia had previously cushioned the impact on Japanese exports of weakening demand from the US and Europe. But Thursday data showed they fell 4 per cent from a year earlier.
"The fall in exports to Asia reflects that their economies are also taking a blow from weakness in developed economies," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. With investors looking increasingly to governments and other authorities to stop the rot, the IMF moved to prop up both Iceland and Turkey. The Fund approved a $2.1bn loan for Iceland, battered by a severe banking crisis. It was part of a larger $10.2bn package.
"The whole IMF package, which includes British and Dutch loans to the Icelandic deposit guarantee agency, is about $10.2bn, out of which the Nordic countries' share is about a quarter," Finland finance ministry under-secretary Martti Hetemaki said. The Fund said Iceland's economy was likely to shrink 9.6 per cent next year and unemployment would quadruple to 5.7 per cent. Sources in Turkey, meanwhile, said that the IMF was ready to agree a precautionary stand-by agreement of $20-40bn, the size depending on talks regarding the country's 4 per cent economic growth target for next year.
Turkey's $10bn regular stand-by loan accord with the IMF expired in May and business leaders have been calling for a fresh agreement to boost the flagging economy. Under a precautionary deal, Turkey would have access to funds if required, whereas a standard stand-by deal would automatically bring in funds. A precautionary deal would also give the government more flexibility in fiscal policy.
Other official help looked less certain. Chances for a $25bn bailout of the US car industry faded further, with little expectation that Democratic leaders in Congress will support a compromise that hinges on negotiations supported by Republicans and the "lame-duck" White House. "I won't say it's completely over. I'm still having conversations with people. But it doesn't look good," Sen Robert Bennett, a Utah Republican, said.
He was referring to the chances of lawmakers striking a deal on aid for General Motors, Ford and Chrysler that could pass. *Reuters