A top Federal Reserve official held out hope that the U.S. economy may start to recover late this year from the crippling recession that is wiping out jobs and threatening to drive General Motors over the edge.
Jeffrey Lacker's forecast that the world's biggest economy will show "positive growth by the end of the year" stands in stark contrast with dire predictions for the world economy of most international organisations and private economists.
International Monetary Fund First Deputy Managing Director John Lipsky said in an interview published on Friday the downturn in the world's top economies could last into next year, justifying unprecedented policy action to contain the crisis.
The European Central Bank and the Bank of England slashed interest rates to record lows on Thursday to battle deepening recessions.
The BoE also pledged 75 billion pounds ($106 billion) of newly created money to buy government bonds and pump funds into the struggling economy, embarking on an scheme known as quantitative easing, unprecedented in Britain, but tried by Japan with limited success at the beginning of the decade. "The emerging consensus is that it looks as if the downturn in the advanced economies will run through this year and into next year," Lipsky told the Daily Mail newspaper.
"Our calculations suggest that the fall in GDP in the fourth quarter of last year and the first quarter of this year is the sharpest we can find in the post-war records," he said.
"A forceful policy response is both warranted and justified,"
GM FEARS
There is also deepening pessimism about the U.S. economy and the health of its banks and companies despite huge amounts Washington has committed to fiscal stimulus and bailouts of financial institutions and Detroit carmakers.
On Thursday, auditors for General Motors, once the world's top carmaker, voiced doubts whether it could survive without declaring bankruptcy, pushing its shares more than 15 percent down and the broader U.S. stock market to 12-year lows.
Asian stocks also fell, unsettled by GM's troubles and Wall Streets' hefty slide, though lingering hopes that China will boost its planned $585 billion in stimulus helped them fare better than their U.S. and European counterparts.
"If you see fire breaking out in someone else's house, it causes worries about your own, too," said Y.S. Rhoo, analyst at Hyundai Securities in Seoul. "The latest development in the U.S. corporate sector is very worrisome."
General Electric, long dogged by worries about the health of its financial arm, acknowledged that a cut in its top-tier credit rating was possible, but its chief financial officer said there was no "time bomb" hidden in its financing arm and that concerns about it were "overdone." A U.S. February payrolls report later on Friday is expected to add to the gloom with economists in a Reuters poll forecasting job losses likely jumped to 648,000 last month, driving the unemployment rate to a 25-year high.
But Lacker, president of the Richmond Federal Reserve and a voting member of the Federal Open Market Committee, sought to dispel the gloom. He told CNBC television that the plunge in discretionary spending may have run its course and could "give people some confidence that we've almost seen the worst of it."
However, fellow FOMC member and Atlanta Fed chief Dennis Lockhart was more sceptical, saying that a rebound would probably be slow as Americans start to save more after credit-gorged spending spree of the past years.
In Europe, central banks were hard at work trying to arrest a deepening slide.
The ECB cut its benchmark rate to a record low 1.5 percent and left the door open to more cuts after data showed the euro-zone economy shrank a record 1.3 percent in the final quarter of 2008 and its staff predicted the slump to deepen to 2.2-3.2 percent this year. Britain's central bank cut rates to 0.5 percent and is now expected to rely on its asset-buying programme of up to 150 billion pounds as it struggles to pull the world's fifth-largest economy out of its worst recession in nearly three decades.
