Evidence of a weakening Chinese economy, feeble data from Australia and Britain and a darkening corporate outlook in the United States reinforced fears of a prolonged global recession on Tuesday.
China's inflation fell to a 17-month low of 4 percent in October, while trade figures were expected to show slowing imports, both serving as signs of a cooling economy and dampening hopes that China's growth will help cushion the impact of the global downturn.
"It shows the Chinese economy is in a sharp slowdown — production is falling, so is demand," said Zhang Yongjun, an economist with a government think-tank in Beijing, after the inflation data.
A fresh wave of gloom gripped equity markets as investors, already spooked by worries about the worsening outlook for U.S. companies ranging from Goldman Sachs to Starbucks, sold shares in Japan, Australia and Hong Kong.
Financial bookmakers predicted major European markets would open down about 1.5 percent.
Expectations profits will be hit hard by a recession some economists warn could rival the pain of 1981-82 cut short a brief spell of optimism on Monday that had been sparked by China's weekend announcement of a nearly $600 billion stimulus package.
"Worrying corporate news from the U.S., plus suggestions that the recession will be longer and deeper than previously thought, are adding to the downside," Matt Buckland, dealer at CMC Markets in London, wrote in a note.
U.S. shares fell on Monday after Deutsche Bank said the equity value of once-mighty General Motors was now zero, sending its stock to a 62-year low, and analysts warned Goldman could post its first quarterly loss.
"It's ugly out there and it's not going to be over tomorrow. It's going to take some time," said Kurt Brunner, portfolio manager at Swarthmore Group in Philadelphia.
The New York Times reported President-elect Barack Obama urged President George W. Bush to back immediate emergency aid for car makers at their first post-election meeting at the White House.
On Monday the United States had pledged more support for AIG , increasing a rescue package for the stricken insurer by $27 billion to $150 billion and easing its terms.
And the fragility of consumer confidence in the world's biggest economy was underlined when electronics seller Circuit City filed for bankruptcy — the biggest retailer to do so since Kmart in 2002 — and coffee chain Starbucks reported disappointing quarterly earnings.
"FEAR REIGNS"
What began as a financial crisis last year, when bank lending dried up in the face of huge losses in the U.S. housing market, is morphing into a broad downturn in the developed world. New powers such as China have been caught up in the domino effect.
A survey of business conditions from National Australia Bank showed confidence at a record low, stoking expectations the country is heading for its first recession since the early 1990s. "It appears that the continuing volatility in global equity markets, emergency financial packages, falling commodity prices, and talk of global recession have finally broken business optimism and now fear reigns supreme," said Alan Oster, group chief economist at NAB.
In Japan, exports fell nearly 10 percent in the first 20 days of October, adding to the evidence that the world's second biggest economy was teetering on the brink of recession.
British retail sales fell for a fifth straight month in October and by the biggest amount in more than three years, a survey released on Tuesday showed.
"These are seriously poor numbers, especially in the run-up to Christmas," said Stephen Robertson, director general of the British Retail Consortium.
Asian stock markets fell, with Japan's Nikkei down 3 percent and Australia's S&P/ASX 200 losing 3.6 percent.
LONG-TERM SOLUTIONS
The economic crisis has left policymakers groping for a coherent response.
Leaders of the world's major economies meet in Washington on Saturday to discuss long-term solutions to the crisis following a series of coordinated moves on interest rates and to recapitalise banks in a bid to fight the financial turmoil.
The flow of funds through money markets picked up on Monday, indicating that the worst of the global credit freeze may be over and focusing attention on the looming recession.
Bank-to-bank lending rates for dollar, euro and sterling funds, as well as the premium for those funds over expected policy rates mostly fell, and dealers reported a slightly increase in activity.
But Asian risk premiums rose on Tuesday amid worries about the vulnerability of U.S. mortgage lender Fannie Mae — which posted a record $29 billion quarterly loss on Monday — to short-term refinancing risk.
Economists see the U.S. economy headed for a recession that will be deeper and last longer than those of 2001 and 1990-1991 according to the monthly Blue Chip Economic Indicators, a closely watched survey.
"Some of our panellists believe it may (rival) the 1981-1982 downturn. … Job losses seem destined to remain sizable over coming months as the recession continues to take its toll," the newsletter said.
