The Bank of England was set to cut record low interest rates yet further on Thursday and a Japanese central banker said unconventional policies could be needed to stave off the global crisis.
European shares fell in early trading on a large writedown by insurer Swiss Re, while rising bad loans at Spain's biggest bank Santander and a bleak outlook at Deutsche Bank fuelled concerns about the wider economy.
Spanish industrial output fell 19.6 percent year-on-year in December, its sharpest slowdown on record. Business lobbies have blamed the banks for the country's severe recession and demanded state intervention if banks fail to boost lending.
Glum figures from U.S. corporate stalwarts such as Kraft Foods stoked fears of deepening recession, the U.S. Senate voted to soften a "Buy American" clause in a $900 billion stimulus plan that President Barack Obama said could spark a trade war.
Governments and policymakers worldwide are scrambling for measures to ease the pain of the worst financial crisis in more than 60 years as consumption falls and unemployment rises.
"It's not too much to say falling exports are triggering a downward spiral of production, incomes and spending, and it looks as if the Japanese economy is in a hard landing," said Atsushi Mizuno, who sits on the Bank of Japan's rate-setting policy board.
"The Bank of Japan should be prepared to act promptly, including taking measures that could be considered unconventional in normal times."
A financial crisis that began with a collapse in risky U.S. home loans, devastating the banking sector, has pushed the United States, the euro zone, Britain and Japan into recession.
RATE CUTS
In response, policymakers have cut interest rates sharply in an effort to stimulate demand and get credit flowing again. Official rates in Japan and the United States are close to zero.
The Bank of England was expected to cut its benchmark interest rate — already at a record low 1.5 percent — by at least another 50 basis points. Some analysts polled by Reuters predict an even bigger cut.
The International Monetary Fund has predicted the British economy, heavily dependent on the ravaged financial sector, could be the worst-hit in the industrialised world, shrinking by 2.8 percent in 2009.
The European Central Bank, which also reviews policy later on Thursday, was expected to leave its key rate untouched at 2 percent after four months of cuts. But financial markets will look for signals of what further steps it might take to shore up the euro zone economy.
A cut in Russia's sovereign debt rating underscored worries that a sharp downturn in Eastern Europe could hurt the euro zone economy and sent the single currency sliding on Wednesday, although it steadied on Thursday.
PROFIT FORECASTS
Deutsche Bank predicted a bleak future for the global economy as it reported a 2008 pretax loss of 5.7 billion euros on heavy writedowns and a slump in revenues from debt trading and other products.
"Looking forward, we see continuing very difficult conditions for the global economy, posing significant challenges for our clients and for our industry," Chief Executive Josef Ackermann said.
Underlining the depth of the downturn in the world's biggest economy, Kraft and Sara Lee Corp cut their profit forecasts for the year on Wednesday, as consumers turned to lower priced competitors. Their shares fell sharply.
"Consumer spending is the lion's share of the economy," said Anthony Conroy, head trader for BNY ConvergEx in New York. "When consumers stop spending, the economy comes to a halt."
After U.S. markets closed, technology bellwether Cisco Systems forecast a slide of as much as 20 percent in its current quarter revenue and said it would cut up to 2,000 jobs.
China's Lenovo, the world's fourth-biggest personal computer maker, posted its first net loss in nearly three years, which was worse than expected, as earnings were hit by weakening global demand.
The U.S. private sector cut more than half a million jobs in January, a report from ADP Employer Services said on Wednesday. Although steep, the figure, which precedes more comprehensive official data on Friday, was below December's 659,000 and slightly lower than had been expected.
Japanese stocks fell more than 1 percent in the face of the gloom from the United States. But shares in Hong Kong and Shanghai gained on hopes the Chinese economy would avoid a severe downturn.
"BUY AMERICAN"
In the United States, where a mammoth stimulus bill is expected to be pushed through the Senate this week, lawmakers approved an amendment requiring the "Buy American" provisions be "applied in a manner consistent with U.S. obligations under international agreements".
The change gives Canada, Mexico, the European Union and certain other major trading partners some comfort they would be exempted from a strict requirement in the bill that all public works projects funded by the stimulus package use only U.S.-made iron, steel and manufactured goods.
"The Buy American provisions … have echoes of the disastrous Smoot-Hawley tariff act," said Republican Senator and defeated presidential candidate John McCain, referring to 1930s legislation often blamed for prolonging the Great Depression.
"It sends a message to the world that the United States is going back to protectionism."
