Swift, Steep Downturn Crosses Globe

By Tomoeh Murakami Tse
Washington Post Staff Writer
Wednesday, February 18, 2009

NEW YORK, Feb. 17 -- Markets around the world plunged Tuesday as evidence mounted that the global economic crisis is worsening.

Japan is suffering its worst downturn in 35 years. The British economy is facing its sharpest decline in almost 30 years. Germany is slumping at its worst pace in nearly 20 years. Meanwhile, the job market in the United States, at the epicenter of the global downturn, is the worst in decades. And emerging economies are contracting at a pace few had predicted just months ago. Even China, whose economy still is growing at a 6.8 percent annual pace, is grappling with vast numbers of the unemployed, raising fears of unrest.

The sharpness of the global slowdown has alarmed economists, who see no obvious engine for recovery.

"Most Western developed economies are going to see the deepest downturn they've seen in a number of decades, in some cases possibly since the Second World War," said Jonathan Loynes, chief European economist at Capital Economics, an independent consultancy in London. "If you go back six months or so . . . there was a hope that some parts of the world will escape the downturn from the U.S. economy and that would help to support the global economy as a whole. And that hope has now faded. We're seeing a downturn in virtually every area of the world."

The Dow Jones industrial average declined nearly 300 points yesterday to finish close to its lowest level of the financial crisis. Fearful investors piled into safe-haven investments such as U.S. Treasurys and gold. Bank stocks plunged worldwide, reflecting waning faith in their ability to hold up in a deteriorating global economic landscape and growing concern over the lack of a coordinated plan to clear the financial system of toxic mortgage assets.

The sell-off came despite the signing of the $787 billion stimulus package by President Obama and as auto executives faced a deadline to submit restructuring plans to the federal government after receiving billions in bailout money.

After a three-day weekend, investors digested dire news Tuesday from countries that were supposed to help lift the world economy out of its downward spiral. The pace of decline in these countries exceeded expectations of even the gloomiest experts, illustrating the depth and breadth of this rare global swoon.

Japan's economy, the world's second-biggest, after only the United States, shrank at an annual rate of 12.7 percent during the last three months of 2008 -- the biggest contraction since the oil crisis of the mid-1970s. The British economy, damaged by the credit crisis, will contract at 3.3 percent, almost twice as much as predicted three months ago, according to the country's biggest business lobbying organization. Those two pieces of data, released Monday, came on the heels of a report Friday showing that the German economy, Europe's largest, shrank by 2.1 percent, the steepest drop since the country's reunification in 1990.

Some economists had argued that countries like Japan and Germany were better equipped to weather the downturn. Germany has little consumer debt, and Japan's banks are in better shape after the banking crisis of the 1990s. But their economies rely heavily on exports, and global demand for items such as Japanese and German cars has evaporated.

In Germany, the benchmark DAX index fell 3.4 percent Tuesday, while London's FTSE index declined 2.4 percent. In Japan, the Nikkei slid 1.4 percent.

Helping to drive European markets lower was a report from Moody's Investors Service warning that Western banks with exposure to Eastern Europe could face credit downgrades. The fear is that the emerging parts of Europe, which had grown rapidly by relying on capital flowing in from the West, are in for a hard landing. The euro fell, as did bank stocks.

Meanwhile, emerging markets, the world's fastest-growing economies, whose demand for goods and services is considered key to a global recovery, showed signs of intensifying weakness. Russia's state-owned news agency said Tuesday that lower commodity prices and the financial crisis are expected to cause the economy to shrink by more than 2 percent this year. In Brazil, where commodity exports have fallen sharply, retail sales in December fell for the third straight month, marking the longest period of declines in six years, a report released Tuesday showed.

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