Pressure grows on Obama as world economy deteriorates

Reuters | 11/22/2008 1:15 AM

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LONDON/NEW YORK - US stocks recovered some ground on opening on Friday, though Citigroup fell further, amid continued fear that central bank moves to stabilize financial markets might not be enough to prevent a prolonged global recession.

Investment bank Goldman Sachs forecast more pain by estimating real U.S. GDP would fall by 5 percent on an annual basis in the current quarter, with unemployment reaching 9.0 in the fourth quarter of 2009.

Euro zone demand plunged and central bankers weighed the bleak prospect of deflation on Friday while a leading U.S. bank and the nation's auto industry buckled amid a leadership vacuum in Washington.

Commentators called on U.S. President-elect Barack Obama to more forcefully signal the economic policy he would enact upon taking over for George W. Bush on January 20, and expressed concern about that the economy might deteriorate as it did during the transition from Herbert Hoover to Franklin Roosevelt in 1932 and 1933.

"Fear is going to take over. We have a new president and the faster we can get the policies out there and tell us where we're going to go and what this administration is going to do, the better off we're going to be," former GE chief Jack Welch told CNBC television.

"This 60-day period ... doesn't look a lot different than the history books from the transition from Hoover to Roosevelt."

High on the agenda for the new president and Congress was an aid package for the U.S. auto industry. House Speaker Nancy Pelosi was due to update reporters at 10:45 EST (1554 GMT).

Another pillar of U.S. capitalism -- Citigroup -- was in trouble after its shares lost another 26 percent on Thursday, falling to 1994 levels. Company leaders met on Friday to determine their next move.

U.S. stocks opened higher after the broad market fell to an 11-and-a-half-year low on Thursday.

The Bank of Japan left its benchmark interest rate at just 0.3 percent and said there would be a long road to recovery.

The United States, Britain and Europe are expected to ease their rates further next month as the worst financial crisis in 80 years hastens recession across much of the globe.

BoJ Governor Masaaki Shirakawa said he was on watch for the risk of deflation as Japan lapses into recession, although he did not forecast its return.

"The global economy is expected to experience a severe adjustment for some time," he told reporters.

St Louis Federal Reserve President James Bullard said with interest rates already low, the U.S. central bank may have to rely on "quantitative easing" to ward off deflation, recalling large BoJ liquidity injections during the 1990s to jump start the economy by flooding it with cash once rates reached zero.

The Fed is expected to cut rates to 0.5 percent next month.

Japan's decade-long battle with steadily falling prices and economic stagnation looms large in officials' memories.

Reversing recession is doubly difficult if prices fall broadly and constantly because there is no incentive to spend as consumers and firms know things can only get cheaper.

European Central Bank Governing Council member Yves Mersch told the Dow Jones news agency that euro zone prices could fall next year although he did not expect broad-based deflation.

"I would not rule out that over one or two months we might have a falling price index," Mersch said.

Euro Zone activity slumps

In the 15-nation euro zone, manufacturing and service activity shrank sharply and inflation pressures vanished.

The Markit Eurozone Purchasing Managers composite index tumbled to a record low of 39.7 in November, below the 50 mark that divides growth from contraction.

The data will strengthen expectations the ECB will cut rates by at least 50 basis points when it meets in December.

The survey confirmed inflation was evaporating -- the prices charged index slipped to 47.6, its lowest level since July 2003.

"Deflation risks also grew," said Markit's Chris Williamson.

Central banks, faced with a sudden collapse in growth as well as inflation, have slashed rates and are expected to keep doing so, although economists warn they may run out of rope before prices hit rock-bottom.