Spain reported its worst economic contraction in 15 years on Thursday, heralding the dire data expected tomorrow from Europe's biggest nations, while Japan highlighted the risk of damaging deflation.
Policymakers around the world fought to keep their economies, large and small, from diving deeper into crisis.
Ireland — one of Europe's most troubled economies — beefed up its bailout for the country's banks with a $9 billion capital injection for its top two banks just as another scandal struck the sector, and South Korea slashed interest rates for the sixth time in four months.
U.S. lawmakers had earlier negotiated a compromise $789 billion stimulus package of tax cuts and government spending aimed at pulling the world's largest economy out of its worst financial crisis since the 1930s.
Erkki Liikanen, a policymaker at the European Central Bank, warned Europeans to expect a lot more bad news despite rays of hope. "I would not say that the worst is over yet, though in some parts of the financial markets improvement has begun to be seen," he said in a newspaper interview published on Thursday. (For details please double-click on )
Economies have yet to hit rock bottom, despite huge government spending to stimulate output. Spain reported its economy shrank 1.0 percent quarter-on-quarter in the last three months of 2008, sending it into recession for the first time since 1993.
Governments appeared powerless to halt the slide. Madrid has already launched a fiscal stimulus package worth over 70 billion euros ($90 billion) and yet its unemployment has risen to the highest level in the European Union. Worse may be to come.
"We expect even sharper (GDP) falls in the first half of the year of as much as -2.2 percent year-on-year rates. We are far from bottoming out," said Citi strategist Jose Luis Martinez.
Spain is not alone. Germany, France, Italy and the wider euro zone report GDP figures on Friday which are all expected to show contraction. Overall, the economy of the 16-nation euro zone is expected to have shrunk 1.3 percent in the final quarter of last year, significantly worse than a 0.2 percent drop in the previous three months.
Ireland, one of the euro zone's smaller economies, has suffered perhaps the most dramatic fall. Finance Minister Brian Lenihan said on Thursday he would not resign despite a series of scandals, including the latest surrounding Wednesday's bailout of its top two banks.
Dublin pledged to inject 3.5 billion euros ($4.5 billion) each into Allied Irish Banks and Bank of Ireland.
But Lenihan hit trouble after it emerged that the financial regulator was examining whether Anglo Irish Bank, which the state nationalised in January, had used billions of euros in deposits from another financial institution to shore up its financial position in September.
"This country is in a very serious financial position. Our banks are stressed, we're battling for our financial stability and calls for a resignation … surprise me," he said.
In Asia, Japanese wholesale prices fell 0.2 percent in the year to January, the first fall since December 2003. The data could mark the start of a period of deflation, which the Bank of Japan has already forecast could last two years.
Falling prices are an uncomfortable reminder for Japan of its last period of deflation that lasted for several years beginning in the late 1990s.
"The data reinforced the view that further steps from the BOJ are necessary to support the economy," said Takeshi Minami, chief economist at Norinchukin Research Institute.
CHINA'S BANKS HEED THE CALL
Despite worrying trade figures a day earlier, record new lending rates in January showed China's banks were heeding a government call to support the economy by extending more credit.
China's banks extended 1.62 trillion yuan ($237 billion) in new loans in January, almost a third as much as they lent in all of 2008, data showed on Thursday, reviving optimism that an end to China's steep downturn could be in sight.
"The bank lending figures are just a stunningly good piece of news for China," said Glenn Maguire, chief Asian economist for Societe Generale in Hong Kong.
And with a single $19.5 billion deal on Thursday, China moved to acquire a sizeable chunk of the raw materials it needs to grow its economy when state-owned aluminium giant Chinalco agreed on a further big investment in global miner Rio Tinto Ltd/Plc.
WASHINGTON
The progress was more modest a day earlier in Washington, where Congressional negotiators agreed to a compromise bill of stimulus measures, 36 percent of which would be in tax breaks.
President Barack Obama wants Congress to act fast as the recession-hit U.S. economy reels from a slump in asset prices, scarce credit and millions of layoffs.
New bank rescue plans from U.S. Treasury Secretary Timothy Geithner, which would use $2 trillion to mop up bad assets and restore credit, have been met with scepticism by markets, mainly because of a perceived lack of detail.
The package could be voted on by both houses of Congress on Thursday.
But the U.S. bank bailout plan, unveiled on Tuesday has disappointed markets and European shares hit a one-week trough, led lower by banks. By 1038 GMT the FTSEurofirst 300 index of top European shares was down 1.7 percent at 789.59 points. Earlier Japan's Nikkei stock index closed down 3.3 percent and the yen rose again amid a continuing investor aversion to risk.
