By Alister Bull
FRANKFURT, Nov 8 - Europe's central bankers slashed interest rates again on Thursday, following in the footsteps of the U.S. Federal Reserve in a battle to prevent the first world recession for a decade.
The European Central Bank and Bank of England both cut rates by a half percentage point, to 3.25 and 4.0 percent respectively, matching the scale of the Fed's move earlier in the week as the woes of the global economy mount.
Plunging business confidence and a tide of job cuts since September 11 attacks on the United States have brought world growth to a standstill with Japan already in recession, the United States heading the same way and Europe teetering on the brink.
Mass U.S. layoffs have spread to the other side of the Atlantic, with the collapse of Belgian airline Sabena [SAB.UL] on Wednesday placing a further 12,000 jobs in jeopardy.
"World economic activity had weakened further," the Bank of England said in a statement explaining its rate decision.
"And evidence on the outlook now suggests that the global slowdown may be somewhat deeper and longer than previously thought. World inflationary pressures, including commodity prices, are weaker," it said.
This echoed the Federal Reserve's warning on Tuesday that "heightened uncertainty and concerns about a deterioration in business confidence both here and abroad are dampening economic activity," as it delivered the tenth rate cut of the year. The ECB issued no statement with its cut. But a news conference with the bank's president Wim Duisenberg was scheduled to get underway at 1330 GMT.
EVASIVE ACTION
The Fed's half percentage point reduction takes the decline in U.S. borrowing costs to 450 basis points this year. They are now at a 40-year low after the country's most aggressive monetary easing since the 1973/75 oil crisis.
That crisis inflicted one of the longest U.S. recessions since World War Two and economists fear that the current downturn in growth may contain the seeds of a similar setback.
"The world is in the midst of a rare synchronous recession. The first leg was triggered by an American-led downturn of the global IT cycle that pushed most of Asia into recession," wrote Steve Roach, chief economist at Morgan Stanley on Wednesday.
"The next leg has been triggered by the terrorist attacks of September 11, which sparked the long-overdue capitulation of the American consumer. As America has exported these two shocks to a U.S.-dependent global economy, the rest of the world has gone down for the count," he said.
Growth among the OECD 30 members will fall to just 1.2 percent next year from 4.1 percent in 2000, according to a draft of the Paris-based Organisation of Economic Cooperation and Development's Economic Outlook, due out on November 20.
NO ESCAPE
Europe had hoped to survive the chill from the other side of the Atlantic when the slowdown emerged at the end of last year.
But its strong financial and business ties with the world's largest economy hit demand for exports and the suicide attacks on New York and Washington sent its businesses and consumers into shock.
Euro zone business confidence hit a five-year low in October, industrial production is already in recession and the fallout for consumer spending will be high.
Job creation has halted in mainland Europe and unemployment in Germany, its largest economy, has risen every month this year bar one and now stands above 3.9 million.
"We estimate that G4 (the United States, the euro zone, Japan and Britain) business confidence has now fallen below the lows of the early 1990s recession and is the lowest for 20 years," investment house Schroder Salomon Smith Barney wrote this week.
The European Commission has slashed its growth forecast for the 12 nation euro zone this year to 1.7 percent from a previous 2.8 percent.
But it publicly admits that growth will be around 1.5 percent this year and next. Private sector economists are less optimistic and a number fear the bloc will tip into a recession, defined as two consecutive quarters of contraction.
Germany is in the worst shape and its industrial output shrank by a worse than expected 2.0 percent month-on-month in September, data on Thursday showed.
This followed a drop in manufacturing orders in September of 4.1 percent, signalling further weakness for output in the months ahead, and a 27,000 jump in the country's jobless numbers to 3.915 million.
BRITISH CAUTION
In Britain growth has remained relatively robust. GDP advanced 0.6 percent in the third quarter, compared with the 0.4 percent contraction suffered in the United States, and most economists expect the Britain to grow by two percent in 2001.
But job losses have been mounting and will take their toll on consumer confidence, which had been the mainstay of the economy with British manufacturing in a much weaker shape.
"We believe that the economy is still slowing despite buoyant retail sales and the better than expected Q3 GDP numbers," said Ruth Lea, head of the policy unit at employers' group The Institute of Directors.
The Bank of England did not disagree. "In the United Kingdom, growth has so far remained close to trend. But reflecting the changed world outlook, the latest surveys of confidence and business activity have weakened," it said.