Central banks in Europe were poised to cut interest rates on Thursday to try to contain a global economic slump that appears to be spreading faster than policymakers had anticipated.
Asia-Pacific nations kept up the flood of grim news after U.S. data overnight showed private sector employers axed jobs at the fastest pace in seven years, and that the economy, in recession for a year, had deteriorated in the past few weeks.
Japanese companies slashed spending, showing the economy was deeper in a recession than the government had estimated. Australian vehicle sales plunged and the Reserve Bank of New Zealand said it probably would have to cut rates again after a record reduction of 150 basis points on Thursday.
"With indicators pointing to an intensifying global adjustment in employment and business spending, our forecast of the deepest four-quarter GDP slide in the developed world since World War Two appears to be on track," JPMorgan economists said in a research note.
A broad swathe of industries have been devastated by the worst financial crisis since The Great Depression, including the U.S. auto industry, which has been lobbying Washington for a bailout.
General Motors Corp and Chrysler LLC are considering accepting a pre-arranged bankruptcy as the last-resort price of getting a multi billion dollar government bailout, Bloomberg reported, citing a person familiar with internal discussions.
The failure of the three biggest U.S. carmakers could trigger a disastrous domino effect on the supply chain that feeds the industry, analysts said.
Asian shares fell as investors braced for a sharp turn lower in the global economy and sought safety in U.S. government debt, pushing benchmark yields to five-decade lows.
THE FLOOR
Zhou Xiaochuan, governor of the People's Bank of China, told Thursday's opening session of "Strategic Economic Dialogue" between China and the United States to prepare for the worst scenario, said an official from the central bank.
Zhou expressed confidence that China could sustain economic growth and financial stability but said there was a need for "timely, effective and pre-emptive measures" to tackle the deepening crisis, the official said.
China slashed interest rates last week to spur an economy now threatened by a crisis that began with U.S. mortgage defaults last year. Australia and Thailand followed this week to avoid recession and the European Central Bank, the Bank of England and the Swedish central bank are likely to cut too.
Analysts expect a 50 basis point reduction from the European Central Bank and twice as much from the Bank of England and Sweden's Riksbank. With the euro zone in recession and Britain heading there, a former BOE policymaker said an even larger cut could be justified.
"If zero is the floor, there is no reason not to go there immediately," Willem Buiter wrote in his Financial Times blog.
The cuts forecast by analysts in Reuters polls would take the euro zone's interest rates to 2.75 percent, Sweden's to 3.75 percent and Britain's to 2 percent. U.S. interest rates will fall below 1 percent if the Fed cuts again as expected later this month.
As interest rates approach zero, central banks are considering other options to revive their economies and avoid the a deflationary spiral that gripped Japan in the 1990s.
A senior Federal Reserve official said on Wednesday purchases of government debt might help tackle deflation, echoing remarks from Fed Chairman Ben Bernanke.
"You also do it to stimulate the economy when further reductions in interest rates are infeasible," Richmond Federal Reserve President Jeffrey Lacker told reporters.
DEFLATION ALERT
Japan resorted to debt purchases to pump money into the economy as it grappled with the problem of falling prices and zero interest rates after an asset bubble collapsed in the 1990s. The world's second-largest economy may soon be facing the same dilemma.
Japanese officials are talking of the risk of deflation, after emerging from a decade of falling prices in 2005, with the economy on course for its longest contraction on record.
The 0.1 percent contraction the government estimated for third-quarter GDP appeared optimistic after a Ministry of Finance survey showed companies cut capital spending by 13 percent.
"With the decline in capital spending this big, it's likely that third-quarter gross domestic product will be revised down," said Kyohei Morita, chief economist with Barclays Capital.
"There's a growing chance that Japan's economy will remain in recession until the second quarter of next year."
The Japanese capital spending numbers were just the latest in a string weak economic data.
In Australia, vehicle sales fell 22.2 percent in November, pointing to a miserable fourth quarter for consumption which could well tip the economy into recession.
The Fed's Beige Book, an anecdotal summary of economic conditions, showed the economy, formally declared to have been in recession since December 2007, had deteriorated in recent weeks.
Data on U.S. private employment suggested Friday's key payrolls report could show job losses topping 300,000, the highest since the aftermath of the Sept. 11, 2001 attacks.
