Us Recession Casts Pall Over Markets

The Age

Thursday October 16, 2008

Vanessa O'Shaughnessy, Investment Reporter

FEARS of a global economic downturn hampered investors as a top US banker confirmed that the US was indeed in recession.

After two euphoric days, Australian shares closed lower, as did most Asian markets.

This was despite confirmation that the US Government would invest $US125 billion ($A177 billion) in nine big banks and an additional $US125 billion in many smaller banks. The Government will also guarantee interbank funding and commercial paper issued before mid-2009.

But the focus has shifted to the state of the US economy.

Speaking in California, the president of the US Federal Reserve's San Francisco branch, Janet Yellen, said it appeared the US economy had officially entered a recession.

"Virtually every major sector of the economy has been hit by the financial shock," she said.

"The economy was weaker than expected in the third quarter, probably showing essentially no growth at all ... and growth in the fourth quarter appears to be weaker yet, with an outright contraction quite likely."

Overnight, the US released its beige book, a summary of anecdotal economic information compiled by each of the Federal Reserve's 12 districts.

European markets fell on opening last night, following a 5% fall in Hong Kong's Hang Seng and after Australia's S&P/ASX 200 Index had closed 35.2 points, or 0.8%, lower at 4300.

Resource companies were worst hit, with BHP Billiton, Rio Tinto and Fortescue Metals proving a drag on the market.

Fortescue fell 92, or 21.1%, to $3.45, vaporising a chunk of Tuesday's sudden 55% rise.

Woodside lost $1.27 to $39.15 and Santos 60 to $12.90 as oil futures plunged to a low of $US77.85 a barrel. Oil futures have dropped more than 46% from their July peak of $US147.27 a barrel.

Yesterday, the Westpac-Melbourne Institute Leading Index suggested economic growth would also slow over the coming three to nine months.

Westpac chief economist Bill Evans said the August numbers pointed to a slowdown, equalling but not exceeding those of 2000-01 and 1995-96.

However, Prime Minister Kevin Rudd's $10.4 billion economic stimulus package, released on Tuesday, is aimed at cushioning the economy from the global shock.

"History tells us that when the economy slows, responsible governments step in to strengthen growth," he said in a television address to the nation.

Data from the federal Treasury and Australian Bureau of Statistics showed the wealth held by Australians in shares, property and other assets had fallen over the past year.

CommSec chief equities economist Craig James said the average Australian had lost $12,100 in the past nine months, and average wealth was now $237,000 a head.

A report from Dun & Bradstreet suggests the difficult credit environment is already affecting Australian businesses. Payment terms, or the amount of time in which businesses pay their bills, have risen from 51.3 days to 55.3 days.

"A significant proportion of business failures are the result of poor cash flow," said D&B chief executive Christine Christian. "Already this year we have seen an 11% increase in failures."

© 2008 The Age

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