Global growth seen weak as Japan mulls fresh aid

London, Singapore | Updated: Dec 31 2008, 07:11am hrs
Global growth will be very weak next year, a senior European banker warned on Tuesday, while Japan reportedly considered a $110 billion scheme to buy bad loans from banks, the latest in a series of government moves aimed at fighting the worst downturn since the 1930s.

Japanese stocks finished modestly higher on their last trading day of 2008, capping a grim year which saw the Nikkei index plunge 42%, the biggest loss in its 58-year history, as recession fears battered global markets.

In Europe, the main stock markets were on track for a 46% loss over the year when trading ends on Wednesday.

Problems in financial markets are affecting the real economy across the world and global growth is expected to be very weak in 2009, European Central Bank Governing Council member John Hurley said in an article for the Irish Times.

He did not give a global figure but the ECB has already cut its forecast for the euro zone, predicting a 1 percent fall in gross domestic product next year.

The head of the German exporters association, BGA, forecast exports will fall next year for the first time since 1993.

Analysts forecast more pain for consumers and investors in 2009 as bleak economic news continued to flood in from around the world, but said hopes of more government rescue packages were helping to shore up financial markets for now.

Everyones pinning their hopes on economic stimulus policies by the United States and possibly China, said Tomomi Yamashita, a fund manager at Shinkin Asset Management.

But people arent watching things like company results as closely as they should be. We cant say for sure that the markets bottomed out until we see these next spring.

The U.S. government expanded its bailout of the auto industry late on Monday, pumping $5 billion into General Motors auto and mortgage financing arm GMAC and lending an additional $1 billion to GM to help it buy shares in GMAC, which is considered crucial to GMs survival.

The loan to GM, the biggest U.S. automaker, would come on top of assistance it was given earlier this month.

The US government agreed on December 19 to rescue GM and Chrysler LLC with up to $17.4 billion in loans to stave off a collapse that would have cost hundreds of thousands of jobs and dealt a severe blow to an economy already in recession.

GMAC has lost $7.9 billion over the last five quarters as the global credit crunch lifted its borrowing costs sharply and the value of many of its assets plunged.

Japans government may also be weighing fresh moves to keep the country from sliding deeper into recession.

The daily Sankei Shimbun reported on Tuesday that the government and central bank hope to launch a $110 billion scheme by the end of March to buy bad loans and other financial assets from banks using public money to ease the corporate credit crunch.

The move would theoretically free up banks to lend more money to companies which are struggling to raise funds through more traditional means such as selling bonds or new shares.

But banks worldwide are growing more reluctant to lend as they brace for more bad loans as economies turn sour.

Analysts also doubted whether any such plan would be as effective today as in the late 1990s, when Japanese banks were saddled with a much bigger pile of bad loans.

The global crisis has shut many firms out of credit markets and slashed their earnings, forcing companies to postpone expansions, reduce production and cut staff, further undermining economic growth and impeding recovery.

South Korea pledged on Tuesday to ramp up support for its banks next year as more grim economic news flooded in.

South Koreas industrial output fell 10.7 percent in November, the biggest monthly decline since 1987, as domestic and export demand slumped. Some analysts say Asias fourth-largest economy will shrink next year for the first time in 11 years, putting pressure on its central bank to cut interest rates further.

In New Zealand, data showed household borrowing fell for the first time in 17 years in November as consumers cut spending in the face of recession.

Many forecasters believe the downturn will continue well into mid-2009, with more layoffs and bankruptcies to come, but investors are hoping battered stock markets will rebound sooner in anticipation of a recovery.

2008 was the year of the serpent, everyone got bitten, said fund manager Paul Biddle with Souls Funds Management in Australia.

Next year has got to be better than this year. Its going to be a tough year ... but there will be some come back in the market, he said.