FRANKFURT – Europe's key central banks slashed interest rates again on Thursday, following in the footsteps of the U.S. Federal Reserve in a battle to prevent the world's worst economic slowdown for a decade.
The European Central Bank and the Bank of England both cut rates by a half percentage point, to 3.25 and 4.0 percent respectively, matching the scale of the Fed's move earlier in the week as the woes of the global economy mount.
Denmark's Nationalbanken followed suit with a 50 basis point cut soon afterwards, but the Swiss central bank bucked the trend and left rates on hold. It pointed out that it had already eased by more than the ECB in response to the chilling climate.
Plunging business confidence and a tide of job cuts since September 11 attacks on the United States have brought world growth to a standstill with Japan already in recession, the United States heading the same way and Europe teetering on the brink.
Mass U.S. layoffs have spread to the other side of the Atlantic, with the collapse of Belgian airline Sabena on Wednesday placing a further 12,000 jobs in jeopardy.
And the outlook for one of the few things helping world growth at the moment -- cheaper oil prices -- was tarnished on Thursday after crude prices climbed back towards $20 per barrel.
This was after comments from Saudi Arabia that it backed a deeper than expected 1.5 million barrel per day cut in output at next week's meeting of OPEC oil producers in Vienna.
WORLD RECESSION
"World economic activity had weakened further," the Bank of England said in a statement explaining its rate decision.
"And evidence on the outlook now suggests that the global slowdown may be somewhat deeper and longer than previously thought. World inflationary pressures, including commodity prices, are weaker," it said.
Duisenberg was in a similarly somber mood and pointedly declined to rule out the risk of a recession.
Asked if the bloc would enter recession, according to the market convention of two consecutive quarters of shrinking growth, ECB President Wim Duisenberg told a press conference: "We do not regard it as likely, yet, a negative growth figure."
But he added: "Figures in the order of 0.1 percent are not very far from it," and said the turnaround he expected in the first half of next year "will be slow and it will be moderate."
This echoed the Federal Reserve's warning on Tuesday that "heightened uncertainty and concerns about a deterioration in business confidence both here and abroad are dampening economic activity."
EVASIVE ACTION
The Fed's half percentage point reduction took the decline in U.S. borrowing costs to 450 basis points this year. They are now at a 40-year low after the country's most aggressive monetary easing since the 1973/75 oil crisis.
That crisis inflicted one of the longest U.S. recessions since World War Two and economists fear that the current downturn in growth may contain the seeds of a similar setback.
"The world is in the midst of a rare synchronous recession. The first leg was triggered by an American-led downturn of the global IT cycle that pushed most of Asia into recession," wrote Steve Roach, chief economist at Morgan Stanley on Wednesday.
"The next leg has been triggered by the terrorist attacks of September 11, which sparked the long-overdue capitulation of the American consumer. As America has exported these two shocks to a U.S.-dependent global economy, the rest of the world has gone down for the count," he said.
Growth among the OECD 30 members will fall to just 1.2 percent next year from 4.1 percent in 2000, according to a draft of the Paris-based Organisation of Economic Cooperation and Development's Economic Outlook, due out on November 20.
NO ESCAPE
Europe had hoped to survive the chill from the other side of the Atlantic when the slowdown emerged at the end of last year.
But deep ties with the world's largest economy hit demand for exports and the suicide attacks on New York and Washington sent its businesses and consumers into shock.
Euro zone business confidence hit a five-year low in October, industrial production is already in recession and the fallout for consumer spending will be high.
Job creation has halted in mainland Europe and unemployment in Germany, its largest economy, has risen every month this year bar one and now stands above 3.9 million.
"Confidence has been harder hit than we thought only a few weeks ago," Duisenberg said. Private economists agree.
"We estimate that G4 (the U.S., euro zone, Japan and Britain) business confidence has now fallen below the lows of the early 1990s recession and is the lowest for 20 years," U.S. broker Schroder Salomon Smith Barney told clients this week.
The European Commission has slashed its growth forecast for the 12 nation euro zone this year to 1.7 percent from a previous 2.8 percent. But it publicly admits that growth will be around 1.5 percent this year and next.
Germany is in the worst shape and its industrial output shrank by a worse than expected 2.0 percent month-on-month in September, data on Thursday showed.
BRITISH CAUTION
In Britain growth has remained relatively robust. GDP advanced 0.6 percent in the third quarter, compared with the 0.4 percent contraction suffered in the United States, and most economists expect the Britain to grow by two percent in 2001.
But job losses have been mounting and will take their toll on consumer confidence, which had been the mainstay of the economy with British manufacturing in a much weaker shape.
"In the United Kingdom, growth has so far remained close to trend. But reflecting the changed world outlook, the latest surveys of confidence and business activity have weakened," the Bank of England said.
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