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16 April 2024

US Congress passes stimulus as EU recession deepens

Speaker of the House Nancy Pelosi (centre) answers questions during a news conference following the passage of the $787 billion economic stimulus bill by Congress. (GETTY IMAGES) 

By Reuters
The US Congress passed a $787 billion (Dh2.9 trillion) stimulus plan to jump-start the economy on Friday, as G7 finance chiefs vowed to ward off the specter of protectionism arising from deepening global recession.

The US package of government spending and tax cuts aimed at reviving the world's largest economy cleared both chambers of Congress, overcoming the resistance of Republicans who sought more tax breaks. President Barack Obama is expected to sign the bill into law soon.

Its approval failed to dispel pessimism on Wall Street, where persistent worries about the health of the banking sector this week have driven stock prices down by about 5 per cent.

Markets were buoyed earlier by hopes that governments were coming up with measures to deal with the crisis and a plan President Barack Obama will announce on Wednesday to stem home foreclosures and stabilise the battered US housing sector.

But a report by Britain's Lloyds Banking Group that its HBOS subsidiary lost £8.5 billion (Dh45 billion) last year renewed fears about the financial system.

US stocks stumbled in volatile trading, closing 1 per cent down. The Dow Jones Industrial Average ended the week 5.2 per cent lower, its worst one-week performance since November 20.

But shares of some big manufacturing companies gained on expectations they will benefit from the US stimulus plan.

US oil futures, after a five-day losing streak, jumped 10 per cent on hopes the stimulus package could pull the economy out of a 13-month recession and restore domestic demand. The bill aims to create or save 3.5 million jobs.

Investors remain jittery about US Treasury Secretary Timothy Geithner's $1 trillion bank rescue plan and, lacking details, they wonder how it would relieve banks of money-losing assets at the root of the financial crisis that spread round the world.

The biggest American banks agreed on Wednesday to foreclosure moratoriums for at least a few weeks until the US government launches an aid program for troubled homeowners using $50 billion included in Geithner's bank rescue package.

There is likely more pain to come. The US economy will shrink a whopping 5.2 per cent in the first quarter, its worst performance since 1982, according to a survey published by the Philadelphia Federal Reserve.



The Group of Seven leading industrialized nations, worried that protectionism is on the rise as the recession worsens, will promise to do all they can to stop the downturn and avoid erecting new trade barriers, according to a statement being prepared for publication on Saturday.

The text, a draft of which was obtained by Reuters while G7 finance ministers were meeting in Rome, said stabilising the economy and financial markets was their "highest priority."

"We reaffirm our commitment to act together using the full range of policy tools to support growth and employment and strengthen the financial sector," the text said.

"The G7 remains committed to avoiding protectionist measures, which would only exacerbate the downturn," it said.

As the G7 gathered in Rome, data showed the euro zone economy as a whole and those of its three biggest members – Germany, France and Italy – all contracted more sharply than expected in the final quarter of 2008.

Germany and Japan said concerns about rising protectionism would be raised at the meeting, focusing on a "Buy American" clause in the US stimulus package and plans by other nations to protect their jobs and industries.

"We are seeing a substantial downturn in economies around the world," UK Chancellor of the Exchequer Alistair Darling told reporters on arrival in Rome. "The euro area figures today demonstrate the scale of the problem we face.

"I believe it is important that every country does what is right to support its own economy, the ... problem for each country is how we get lending going again," he said.

But he added, "To retreat into protectionism would be disastrous, just as it was in the 1930s."

The euro zone economy saw its deepest contraction on record in the fourth quarter of 2008, shrinking 1.5 per cent against the previous quarter.

German GDP fell 2.1 per cent quarter-on-quarter, the worst decline since the country's unification in 1990.

"The economy is now in its worst postwar recession. ... There can be no talk of economic recovery for now," said Alexander Krueger of Bankhaus Lampe.

French gross domestic product fell 1.2 per cent in the fourth quarter of 2008. Economy Minister Christine Lagarde predicted a contraction of more than 1 per cent in 2009.

Italy's economy shrank by 1.8 per cent in the last three months of 2008, the steepest drop since 1980.

Germany's Bundestag, the lower house of parliament, approved a €50 billion (Dh239 billion) stimulus package, adding to a first installment last year that the government said was worth some €31 billion. The upper house must also approve it.

Australia's parliament passed a A$42 billion (Dh101 billion) stimulus plan after last-minute dealmaking.

In Britain, the Bank of England launched a scheme to help the recovery of credit markets by buying short-term corporate debt.

Asian shares reversed three sessions of losses during which investors had sought safe havens, with hopes rising that governments around the world were coming up with measures to cushion the worst of the global downturn.

The MSCI index of non-Japan Asia-Pacific stocks rose 2.48 per cent. Japan's Nikkei ended 0.96 per cent higher. In Europe, the FTSEurofirst 300 index was 1.93 per cent higher as optimism about a US mortgage subsidy plan boosted banks.