Monday, 27 October 2008

Recession reality setting in- slowly

The more than $4 trillion that governments have thrown at the financial crisis pales in comparison with the wealth destroyed in falling stock markets, and conditions may get worse as economic reality sets in.

While there are some encouraging signs that efforts to revive credit markets are beginning to gain traction and lending is slowly resuming, companies are sounding the alarm over the damage already done to their profits.

Japan's Sony is finding fewer buyers for its cameras and televisions. French carmaker PSA Peugeot Citroen is planning "massive" production cuts as demand fades. Online retailer is warning that holiday sales won't be as strong as expected.

The sheer volume of companies reporting disappointing earnings is as distressing as the breadth of industries and countries affected.

"We are now in the midst of a full-blown global financial crisis," said Citigroup analyst Robert Buckland. "Policy-makers have been unable to calm the storm, although the increasingly aggressive response offers some hope. The earnings downturn looks to have much further to go."

In the five weeks since investment bank Lehman Brothers collapsed, stock markets have fallen so sharply that they have wiped out $12 trillion in wealth, according to Citigroup.

Consumer and business confidence has also nose-dived since then, and spending has fallen sharply.

That will no doubt weigh heavily in the Federal Reserve's decision Wednesday on whether to cut short-term borrowing costs.

Investors widely expect another half-point reduction, which would take the benchmark federal funds rate to 1 percent.

When the credit crisis first spiked in August 2007, the rate stood at 5.25 percent.

success in easing the credit market strains that drove up borrowing costs and effectively barred many healthy borrowers from accessing cash.

Interbank lending rates have begun to ease and bank borrowings from the Fed slipped last week for the first time since Lehman's collapse.

If those trends continue, it would go a long way toward fostering a quicker economic recovery.

However, the short-term damage is already done.

A report due Thursday is expected to show that the US economy contracted at a 0.5 percent annual pace in the third quarter, according to a poll.

JPMorgan economist Bruce Kasman thinks things may get much worse from there. He is predicting that GDP will decline at a 4 percent clip in the fourth quarter, which would be the worst since 1982.

Source: EconomicTimes

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