World economy picture gloomy as risks rise, confidence sags

Alister Bull, Reuters, Frankfurt

Global recession risks rose again on Monday as business confidence slumped in Europe and Japan while the United States braced for more bad economic news.

With survey data signalling that the worst is still to come, Group of Seven central banks are expected to cut interest rates again with the Federal Reserve seen acting as soon as Tuesday.

Monday's data underlined the threat of simultaneous slowdown in the world's three main economic blocs, as deep shock continues among investors and consumers in the wake of the Sept.11 attacks on the United States.

Reuters Eurozone Purchasing Managers' Index of manufacturers hit the lowest level in its four-year history in September and a key indicator of Japanese corporate confidence, the "tankan" survey, tumbled.

Later on Monday the U.S. NAPM industrial survey will be released and economists expect it to fall to 45.5 in September from August's 46.9, spelling more woe for mounting U.S. unemployment.

Companies have slashed thousands of jobs in the aftermath of the attacks on New York and Washington, led by the airline industry with Swissair Group over the weekend the latest to declare it needed a cash bailout to stay airborne. Swissair Group on Monday was mulling a partial rescue bid by Switzerland's top two banks which could keep parts of the Swiss flag carrier flying.

Global growth had already slowed sharply this year in the world's three main economic blocs before Sept.11..

Some had hoped it had found a bottom after the second quarter and was heading for recovery, but the survey results tell a different story.

And economists warn that the fallout from last month's attacks will be much worse if it turns out that economic activity had already taken a hit over the summer.

Monday's data increased this risk because the gloom it uncovered did not reflect reaction to the Sept. 11 catastrophe.

"These figures just underline that we haven't seen the worst yet. The euro zone downturn is going to deepen before we see any chance of a recovery," said analyst David Brown at Bear Sterns in London.

The survey showed that manufacturing in the 12-nation euro zone contracted in September at the sharpest pace since the series began in June 1997.

The headline index fell to 45.9 from 47.5 in August. It has been below the 50 line that divides growth from contraction for six straight months, signalling that the region's manufacturing sector has entered recession.

PMI surveys also fell in Sweden, Denmark and Britain in further proof that no country was immune.

In defence European officials have maintained a campaign of defiant optimism and were at it again on Monday.

European Central Bank Vice President Christian Noyer told French newspaper Liberation that the shock from the destruction was a 'one-off' which would only have a short term impact on economic activity.

And British Finance Minister Gordon Brown was expected to voice a similar message later on Monday when he addresses his Labour Party's annual conference. But news from abroad is not comforting for a nation which relies heavily on exports.

Growth in Japan was already shrinking in the second quarter this year and its latest "tankan" survey of corporate sentiment painted a very bleak picture indeed, tumbling by much more than expected to minus 33 in September from minus 16 in June.

That was far below the estimate of minus 14 carried in the previous survey and short of a median forecast of minus 28 in a recent Reuters poll of economists.

Finance Minister Masajuro Shiokawa, who had described the survey outcome as "very bad", told Reuters the report showed there was a need for strong measures to boost the economy:

"There's a need for further, aggressive economic steps. We shall implement various measures in a concentrated fashion."

With interest rates already near absolute zero, public debt at the highest level among major industrialised nations and a banking system buried beneath bad debt, analysts say Japan has few policy options left.

Luckily for the rest of the world, Japan's troubles are extreme and none of the major economies are stricken with such a sclerotic banking system.

However, analysts note the United States is running a massive trade deficit while private sector credit has ballooned to record levels.

And despite the Federal Reserve's cutting rates by 350 basis points so far this year in one of the most aggressive easing campaigns of its history, the country is still staring down the gunbarrel of recession.

That will probably not stop the Fed from easing when its board meets on Tuesday and whether it's half or a quarter of a point, it will still take rates below 3.0 percent for the first time since the low-inflation, high growth days of the 1960s.

Its emergency half point cut before Wall Street re-opened on September 17 was followed by other Group of Seven central banks and the betting that others will follow its lead again is high.

The Bank of England has a meeting scheduled for Wednesday and Thursday and some say it will ease by quarter of a point.

In Frankfurt the ECB has its next scheduled council meeting on October 11 following a weekend gathering of G7 finance ministers and central bank governors in Washington.

The bank's main mission is to protect price stability. It left interest rates on hold when it met on Sept.27, but has signalled that it sees no risk from inflation in the current subdued business climate, raising hopes of another cut soon.

This view got further impetus on Saturday when ECB council member and Greek central bank chief Lucas Papademos told a local newspaper falling inflation in the euro zone may permit more monetary loosening to combat the slowdown.