European industry output dives, Japan deflation looms

LONDON/TOKYO - Euro zone industrial output suffered a record plunge and Spain reported on Thursday its worst economic contraction in 15 years, heralding dire GDP data expected tomorrow from Europe's biggest nations.

By (Reuters)

Published: Thu 12 Feb 2009, 8:22 PM

Last updated: Thu 2 Apr 2015, 3:55 AM

Japan highlighted the risk of damaging deflation and only China -- whose companies are seeking bargains from heavily-indebted western firms -- offered any hope with a big rise in bank lending.

Policymakers around the globe are fighting to prevent their economies, great and small, from diving deeper into crisis.

In the United States, Congress is poised to pass as early as Thursday a $789 billion package of tax cuts and spending programmes aimed at reviving the staggering economy.

At the other end of the scale Ireland -- one of Europe's smallest but most troubled economies -- beefed up a bailout for its banks with a $9 billion capital injection for its top two lenders just as another scandal hit the sector.

Erkki Liikanen, a policymaker at the European Central Bank (ECB), warned people to expect more bad news.

"The economic crisis seems to be lasting longer and spreading," he said in remarks published on Thursday. "I would not say that the worst is over yet, though in some parts of the financial markets improvement has begun to be seen."

Euro zone industrial production proved his point, plunging a record 12 percent year-on-year in December, the EU statistics office Eurostat reported on Thursday.

"The economy took a breathtaking turn for the worse at the end of last year in the aftermath of the near collapse of the financial system," said Nick Kounis, economist at Fortis.


Spain reported its economy shrank 1 percent quarter-on-quarter in the last three months of 2008, sending it into recession for the first time since 1993.

Madrid has already launched a fiscal stimulus package worth over 70 billion euros ($90 billion) and yet its unemployment has risen to the highest level in the European Union.

Meanwhile Germany, France, Italy and the wider euro zone report GDP figures on Friday which are all expected to show contraction. Overall, the economy of the 16-nation euro zone is expected to have shrunk 1.3 percent in the final quarter of last year, significantly worse than a 0.2 percent drop in the previous three months.

The ECB has cut rates to 2.0 percent but they remain far above near-zero levels in the United States, Japan and Switzerland, and just 1 percent in Britain, Canada and Sweden.

Liikanen signalled that the ECB will respond next month. "Inflationary development and the markets' inflation expectations are now in line with our price stability objectives," he said.

"That gives us room to continue taking measures, and at the next meeting it is possible that we could move."

Ireland has suffered perhaps the most dramatic fall in the euro zone. Dublin pledged to inject 3.5 billion euros ($4.5 billion) each into Allied Irish Banks and Bank of Ireland.

But the bailout came amidst news that the country's financial regulator is examining whether Anglo Irish Bank, which the state nationalised in January, had used billions of euros in deposits to artificially shore up its financial position in September.


In Asia, Japanese wholesale prices fell 0.2 percent in the year to January, the first drop since December 2003. This could mark the start of a period of deflation, which the Bank of Japan has already forecast could last two years.

"The data reinforced the view that further steps from the BOJ are necessary to support the economy," said Takeshi Minami, chief economist at Norinchukin Research Institute.


Despite worrying trade figures a day earlier, record new lending rates in January showed China's banks were heeding a government call to support the economy by extending more credit.

China's banks extended 1.62 trillion yuan ($237 billion) in new loans in January, almost a third as much as they lent in all of 2008, data showed on Thursday, reviving optimism that an end to China's steep downturn could be in sight.

"The bank lending figures are just a stunningly good piece of news for China," said Glenn Maguire, chief Asian economist for Societe Generale in Hong Kong.

With a single $19.5 billion deal on Thursday, China moved to acquire a sizeable chunk of the raw materials it needs to grow its economy when state-owned aluminium giant Chinalco agreed on a further big investment in global miner Rio Tinto Ltd/Plc.

Rio Tinto will sell nearly half its stake in the world's biggest copper mine, nearly a third of its share in a major bauxite mine and sizeable stakes in key operations in Australia, Indonesia and the Americas under the deal.

However, Rio Tinto's chairman-elect Jim Leng quit the board this week in protest over the pending deal with Chinalco, which needs approval by shareholders and Australian regulators.

Chinalco may not be alone on the acquisition trail. General Motors Corp has held talks with China's SAIC Motor Corp about selling assets as the U.S. automaker races to raise cash, two sources familiar with the discussions said.

GM approached SAIC Motor recently with an offer to sell some of its stake in their 50-50 joint venture that builds and markets Buick, Cadillac and Chevrolet models in China, they said. GM and SAIC Motor had no comment.


The progress was more modest a day earlier in Washington, where Congressional negotiators agreed to a compromise bill of stimulus measures, 36 percent of which would be in tax breaks.

President Barack Obama wants Congress to act fast as the recession-hit U.S. economy reels from a slump in asset prices, scarce credit and millions of layoffs.

New bank rescue plans from U.S. Treasury Secretary Timothy Geithner, which would use $2 trillion to mop up bad assets and restore credit, have been met with scepticism by markets, mainly because of a perceived lack of detail.

The package could be voted on by both houses of Congress on Thursday.

But the U.S. bank bailout plan, unveiled on Tuesday has disappointed markets and European shares hit a one-week trough, led lower by banks. By 1254 GMT the FTSEurofirst 300 index of top European shares was down 1.4 percent at 792.40 points. Earlier Japan's Nikkei stock index had closed down 3.3 percent while the dollar and yen strengthened broadly amid a continuing investor aversion to risk.

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