Tuesday, January 20, 2009

Europe: Long And Deep Recession Forecast

Long And Deep Recession Forecast In Europe
A Gloomy Forecast for Australian Economy in 2009

By The Associated Press | 20 January 2009

BRUSSELS, Belgium (AP)— The European Union said Monday it is facing a "deep and protracted recession" and slashed growth forecasts, while Britain announced its second massive bank bailout in just over three months in another wave of bad economic news in Europe. The economy in the 16 nations that use the euro will shrink by 1.9 percent in 2009, with the entire EU contracting 1.8 percent, the European Commission said. That is a drastic cut from its earlier forecasts of 0.1 percent for the euro zone and 0.2 percent for the EU.

The 27-member bloc said 3.5 million jobs will disappear in the EU in the year ahead as business and household spending falls and banks tighten lending. Government demand and investment will be the only source of growth— but that carries a heavy price tag. Government deficits will hit the highest level in 15 years as they borrow heavily to stoke growth to combat the world economic crisis that began with bank losses on securities backed by shaky U.S. mortgages.

The EU executive raised warning flags about credit conditions, saying European states may need to inject more than the euro300 billion ($398 billion) they have already put into banks "to avoid a sustained drag on bank lending." It said the economy would be faring much worse without current EU nations' plans to boost growth by spending 1 percent of gross domestic product this year, which should bring an additional 0.75 percent growth.

Britain— an EU member which has not joined the euro— said it would launch its second bank bailout in just over three months by offering banks a chance to guarantee bad securities for a fee in return for a requirment to increase lending to businesses and consumers. It also set aside 50 billion pounds ($74 billion) for the Bank of England to buy troubled assets from banks. Bank stocks plunged, with Royal Bank of Scotland shares falling 70 percent to only 10 pence after it announced the largest loss in British corporate history and the government raised the 58 percent stake it took as part of the first bailout to around 70 percent.

The EU said the downswing will be particularly marked in Britain and more protracted in Spain. It warned that the outlook was still exceptionally uncertain, describing the global economic crisis as the worst since the second world war. The EU predicted a moderate recovery in 2010, when the EU could grow 0.5 percent, with the first green shoots to come in the second half of 2009.

European Central Bank President Jean-Claude Trichet was more gloomy, saying this year would be "very difficult" and a rebound might only come in 2010. In a speech in Paris, he said officials had underestimated the risks facing the economy in the last two years and growth this year would be substantially lower than the ECB's last forecast that the euro area would contract by up to 1 percent this year. The EU warned that "the main issue is whether the recovery will be a lasting one."

In Europe, it cautioned that it could not rule out that "very weak economic sentiment may continue for some time as concerns about a long and deep recession spread, particularly with unemployment now on the rise." Falling exports will hit Germany hard. Europe's largest economy is also the world's biggest exporter and will likely shrink 2.3 percent this year, it said. German Finance Minister Peer Steinbrueck said this chimed with Berlin's own figures.

A sharp German slowdown will hit its nearest neighbors and trading partners. The EU says the British economy will also shrink, about 2.8 percent this year, as the financial sector contracts and a housing bubble deflates, while France will contract by 1.8 percent. Spain and Ireland will also suffer sharply as recent booms go bust and jobless queues lengthen— with nearly one in five Spanish workers without a job by 2010.

But the EU's top economy official, EU Economic and Monetary Affairs Commissioner Joaquin Almunia, dismissed speculation that either nation's soaring public debt would force them to quit the euro currency— which limits the power governments have over fiscal policy. Ratings agency Standard & Poors put euro nations Ireland and Portugal on negative watch last week and have downgraded Spain and Greece as they see more risk of default on public debt. "In the case of the euro area members, I don't think at all that the risks are high or are significant," Almunia told reporters.

He was more critical of Italy and Britain, which he said missed the chance to pay off debt during good times. Governments will see debt and deficits soar as they spend billions of euros (dollars) to speed up the economy and save banks while unemployment benefits increase and tax revenues fall. For euro nations, efforts to balance the books will be swept away as Ireland, Greece, Spain, France, Italy, Portugal and Slovenia will this year break a key EU budget rule to keep their deficits under 3 percent. Germany, Belgium, Austria and Slovakia could join them in 2010.

The EU forecast sees bank lending falling further this year and was supportive of banking bailouts to downsize lenders' balance sheets. However, it did not think much of some governments' rescue measures, particularly temporary cuts in corporate profit taxes and sales tax, saying these simply [postponed] problems for the future.


A Gloomy Forecast For Australian Economy In 2009

By Meraiah Foley | 20 January 2009

SYDNEY, Australia— The Australian economy, once considered a relatively save haven, is headed for a steep downturn in 2009, in part because of slower-than-expected growth in China, a leading forecaster said Monday. In a starkly worded quarterly outlook report, the Australian research firm Access Economics warned that the mining-led economy "will unwind scarily fast" in 2009, sending the Australian dollar and interest rates crashing. "This is not just a recession," the report said. "This is the sharpest deceleration Australia’s economy has ever seen."

The report predicted that the central bank would be forced to cut interest rates to 2.5 percent, from 4.25 percent, to stimulate growth. About 300,000 jobs will be lost and corporate profits will be cut in half, it said. "China’s slowdown is Australia’s recession," the report said. "Many businesses will fail, as demand gains shrink."

It is the latest in a string of worsening predictions about the Australian economy, which has long regarded itself as relatively immune to the financial problems affecting the United States and Europe because of its dependence on commodities. Australian banks have so far avoided crippling exposure to bad mortgage-related debts in the United States, and many economists had believed that continued, though weaker, demand from China for Australian mineral resources would save the country from recession. In its last forecast in November, the International Monetary Fund predicted that China would continue to record strong growth and that Australia would be one of the few industrialized economies to grow in 2009, albeit at a modest 1.8 percent.

But the breakdown in financial markets last year shattered confidence around the world, leaving few corners of the world untouched. A sharper-than-expected fall in Chinese demand for resources exposed Australian vulnerability, the report said. Justin Smirk, an economist with Westpac Banking, one of the biggest Australian banks, said the report was "not far off consensus" among analysts, who are busy revising their forecasts downward as the global economy continues to sour.

"The bottom line is that I would be expecting the I.M.F. to be downgrading its outlook for Australia," Mr. Smirk said. Wayne Swan, the Australian treasurer, said the government, which has already thrown billions of dollars in stimulus money at the economy, was prepared to "take further decisive action" if necessary. But how much more leeway Mr. Swan will have is open to debate.

The Australian government has enjoyed steady budget surpluses and is under political pressure to keep deficit spending to a minimum. Access Economics predicted that falling commodities prices would drag company profits down, meaning fewer corporate taxes to fill federal coffers and inevitable budget deficits. "There’s no doubt that the slowing of the global economy— the impact on commodity prices— certainly has very significant ramifications for growth here," Mr. Swan told a national broadcaster Monday. "It will certainly impact upon the budget bottom line."



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