US Economy Shrinks as IMF Warns of Great Depression

Tuesday 23 December 2008

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by: Agence France-Presse

Stocks continue to fall worldwide as the IMF warns of another possible "Great Depression" in the US. (Photo: Reuters)

Washington - The US economy shrank in the third quarter, official data confirmed Tuesday, as the IMF's top economist warned of a second Great Depression offering no respite from relentless gloom ahead of Christmas.

The abrupt 0.5 percent contraction of gross domestic product (GDP) in the world's largest economy was seen as marking the start of a steep downturn for the United States after GDP growth of 2.8 percent in the second quarter.

Stocks on Wall Street rose in early trading, however, as the contraction had been expected and was unrevised from a previous estimate. The Dow Jones Industrial Average was up 0.54 percent and the Nasdaq rose 0.60 percent.

"This report is largely old news," said John Ryding at RDQ Economics, who forecast fourth-quarter data out next month would be far bleaker.

"Given signs that the recession has deepened in the current quarter, we look for around a 6.0 percent drop in real GDP," he said.

Britain's economy also shrank by 0.6 percent in the three months to September compared to the previous quarter, against a previous estimate of 0.5-percent contraction, the Office for National Statistics said.

Britain and the United States will be in recession if their economies contract again in the fourth quarter, according to the traditional definition of a recession as two consecutive quarters of negative economic growth.

The IMF's top economist, Olivier Blanchard, maintained that governments around the world should boost domestic demand in order to avoid another Great Depression similar to the global downturn that shook the world in the 1930's.

"Consumer and business confidence indexes have never fallen so far since they began. The coming months will be very bad," Blanchard said in an interview with the French newspaper Le Monde.

"It is imperative to stifle this loss of confidence, to restart household consumption, if we want to prevent this recession developing into a Great Depression," he added.

New data out in France offered some relief, showing that household consumption of manufactured goods - a key growth indicator - rallied 0.3 percent last month after slumping in October.

"It is a first small Christmas present for the French economy," said Alexander Law, an economist at the Xerfi research centre in Paris.

The European Central Bank also issued some heartening pre-Christmas data showing that the eurozone's current account deficit had narrowed to 6.4 billion euros (9 billion dollars) in October from 8.8 billion euros in September.

But elsewhere in Europe the news was more downbeat. Retail sales in Italy went down 0.3 percent in October, Denmark's economy contracted 0.4 percent in the third quarter and the Dutch economy had zero growth, official data showed.

Finland's unemployment rate rose to 6.0 percent in November from 5.8 percent in October and the Polish central bank cut its key lending rate by 75 basis points to 5.00 percent in a bid to fend off a recession.

In Ukraine, thousands of people took to the streets for a union-led protest to demand higher wages and more social protection in the former Soviet republic, which has been hit hard by the global economic crisis.

News of weakening growth also sent the British pound sliding under 1.0550 euros, nearing a record low of 1.0463 reached last week, as dealers bet on more interest rate cuts from the Bank of England and forecast parity with the euro.

The dollar exchange rate also drifted lower against the euro and the yen.

European stocks rose in early afternoon trading after the announcement of US GDP figures, with the FTSE 100 index in London up 0.85 percent, the Frankfurt Dax up 0.73 percent and the CAC 40 in Paris up 0.92 percent.

Asian stocks closed mostly down, with the Hong Kong stock market shedding 2.8 percent and Shanghai sinking 4.55 percent as a smaller-than-expected Chinese interest rate cut failed to boost market sentiment.

Oil prices went up slightly in New York, rising above 40 dollars per barrel.

Energy analysts were also keeping a close eye on a meeting of key world natural gas exporters in Moscow amid fears of a "gas OPEC" similar to the Vienna-based oil cartel that could raise gas prices for Western consumers.

Russian Prime Minister Vladimir Putin said at the forum that the "era of cheap gas" was coming to an end and Venezuelan Energy Minister Rafael Ramirez argued that gas exporters' group should be based on the "same principles" as OPEC.