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Wednesday, 24 December 2008

US economy shrinks as IMF warns of Great Depression

LONDON (AFP) - - The US economy shrank by 0.5 percent in the third quarter, official data showed on Tuesday as Britain edged ever closer to a recession and the IMF's top economist warned of a second Great Depression.

The abrupt contraction of gross domestic product (GDP) in the world's largest economy, confirming a first estimate, was seen by analysts as marking the start of a steep downturn for the United States after GPD growth of 2.8 percent in the second quarter.

Britain's economy also shrank by 0.6 percent in the three months to September compared to the previous quarter, against a previous estimate of 0.5-percent contraction, the Office for National Statistics said.

Britain and the United States will be in recession if their economies contract again in the fourth quarter, according to the traditional definition of a recession as two consecutive quarters of negative economic growth.

The IMF's top economist, Olivier Blanchard, warned governments around the world should boost domestic demand in order to avoid a Great Depression similar to the downturn that shook the world in the 1930s.

"Consumer and business confidence indexes have never fallen so far since they began. The coming months will be very bad," Blanchard said in an interview with the French newspaper Le Monde.

"It is imperative to stifle this loss of confidence, to restart household consumption, if we want to prevent this recession developing into a Great Depression," he added.

New data out in France offered some respite from the gloom, however, showing that household consumption of manufactured goods -- a key growth indicator -- rallied 0.3 percent last month after slumping in October.

"It is a first small Christmas present for the French economy," said Alexander Law, an economist at the Xerfi research centre in Paris.

But in Italy, retail sales figures went down 0.3 percent in October.

Denmark's economy contracted 0.4 percent in the third quarter and the Dutch economy showed zero growth, official data showed. Finland's unemployment rate rose to 6.0 percent in November from 5.8 percent a month earlier.

Elsewhere in Europe, the Polish central bank cut its key lending rate by 75 basis points to 5.00 percent, following a further cut in interest rates in Hungary on Monday by half a percentage to 10.0 percent.

The European Central Bank issued some heartening pre-Christmas data showing that the eurozone's current account deficit narrowed to 6.4 billion euros (9.0 billion dollars) in October from 8.8 billion euros in September.

News of weakening growth sent the British pound sliding under 1.0550 euros, nearing a record low of 1.0463 reached last week, as dealers bet on more interest rate cuts from the Bank of England and forecast parity with the euro.

The dollar also drifted lower against the euro and the yen in muted trading conditions ahead of the Christmas holidays. In late morning trading, the euro firmed to 1.3959 dollars, from 1.3944 dollars in New York late on Monday.

European stocks rose in early afternoon trading after the announcement of US GDP figures, with the FTSE 100 index in London up 0.80 percent, the Frankfurt Dax up 0.89 percent and the CAC 40 in Paris up 0.51 percent.

Asian stocks closed mostly down, with the Hong Kong stock market shedding 2.8 percent and Shanghai sinking 4.55 percent as a smaller-than-expected Chinese interest rate cut failed to boost market sentiment.

Oil prices also fell further to below 40 dollars a barrel in Asian trade, with New York's main futures contract, light sweet crude for delivery in February, shedding eight cents to 39.83 dollars a barrel.

The contract had fallen to 39.91 dollars in New York on Monday.

Energy analysts were also keeping a close eye on a meeting of key world gas exporters in Moscow amid fears of a "gas OPEC" similar to the Vienna-based oil cartel that could raise natural gas prices.

In a keynote speech, Russian Prime Minister Vladimir Putin told the conference that the "era of cheap gas" for consumers was coming to an end because of the expense of developing new fields.

Venezuelan Energy Minister Rafael Ramirez said: "We see in this forum an opportunity to build a solid organisation, which has in its foundation the same principles that gave birth to OPEC."

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