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21 February 2024

Corporate outlook bleak as UK poised to cut rates

The Bank of England is expected to further cut interest rates to help the UK's ailing economy. (GETTY IMAGES)

By Reuters
Fears of deepening recession in the developed world gnawed at investors on Thursday, after glum earnings from US corporate stalwarts such as Kraft Foods and as the Bank of England looked set to cut record low rates further.

As governments worldwide seek measures to ease the pain from the worst financial crisis in decades, the US Senate voted to soften a "Buy American" clause in a $900 billion (Dh3.3 billion) stimulus plan after President Barack Obama voiced concerns it could spark a trade war.

A senior Bank of Japan official said the central bank should be prepared to take unconventional policy steps given the risk of further deterioration in the world's second-largest economy, which is already deep in recession.

"It's not too much to say falling exports are triggering a downward spiral of production, incomes and spending, and it looks as if the Japanese economy is in a hard landing," BOJ Policy Board member Atsushi Mizuno said in a speech in central Japan.



A financial crisis that began with a collapse in risky US home loans, devastating the banking sector, has pushed the United States, the euro zone, Britain and Japan into recession.

Underlining the depth of the downturn in the world's biggest economy, Kraft and Sara Lee Corp cut their profit forecasts for the year on Wednesday, as consumers turned to lower priced competitors. Their shares fell sharply.

"Consumer spending is the lion's share of the economy," said Anthony Conroy, head trader for BNY ConvergEx in New York. "When consumers stop spending, the economy comes to a halt."

After US markets closed, technology bellwether Cisco Systems forecast a slide of as much as 20 per cent in its current quarter revenue and said it would cut up to 2,000 jobs.

The US private sector cut more than half a million jobs in January, a report from ADP Employer Services said on Wednesday. Although steep, the figure, which precedes more comprehensive official data on Friday, was below December's 659,000 and slightly lower than had been expected.

In Australia, investment bank Macquarie Group warned its profit would fall 50 per cent this year, the first decline in 17 years, due to writedowns. But its shares rose on relief operations had not deteriorated as much as expected.

Asian stocks mostly eased in the face of the gloom from the United States, although they later turned higher on hopes the giant Chinese economy would avoid a severe downturn and after the US voted to soften its "Buy American" plan.



Interest rates have been falling sharply around the world since the financial crisis began in 2007 in an effort to stimulate demand and get credit flowing again.

In Britain, the Bank of England was expected to cut its benchmark interest rate – already at a record low 1.5 per cent – by at least another 50 basis points. Some analysts polled by Reuters predict an even bigger cut.

The International Monetary Fund has predicted the British economy, heavily dependent on the ravaged financial sector, could be the worst-hit in the industrialised world, shrinking by 2.8 per cent in 2009.

"The economy is in deep recession and ITEM believes that interest rates should fall further – possibly to zero," said Andy Goodwin, senior economic adviser to the Ernst and Young ITEM Club, a forecasting group.

The European Central Bank, which also reviews policy later on Thursday, was expected to leave its key rate untouched at 2 per cent after four months of cuts. But financial markets will look for signals of what further steps it might take to shore up the euro zone economy.

A cut in Russia's sovereign debt rating underscored worries that a sharp downturn in Eastern Europe could add another weight to the euro zone economy and sent the single currency sliding on Wednesday, although it steadied on Thursday ahead of the rate decision.

Western European banks lent heavily to Russia and other eastern European countries and Russia was a big buyer of euro zone exports when oil prices were high.



In the United States, where a mammoth stimulus bill is expected to be pushed through the Senate this week, lawmakers approved an amendment requiring the "Buy American" provisions be "applied in a manner consistent with US obligations under international agreements".

The change gives Canada, Mexico, the European Union and certain other major trading partners some comfort they would be exempted from a strict requirement in the bill that all public works projects funded by the stimulus package use only US-made iron, steel and manufactured goods.

"The Buy American provisions ... have echoes of the disastrous Smoot-Hawley tariff act," said Republican Senator and defeated presidential candidate John McCain, referring to 1930s legislation often blamed for prolonging the Great Depression.

"It sends a message to the world that the United States is going back to protectionism."