Swift, Steep Downturn Crosses Globe

Japan is suffering its worst downturn in 35 years. The British economy is facing its sharpest decline in almost 30 years. Germany is slumping at its worst pace in nearly 20 years. Meanwhile, the job market in the United States, at the epicenter of the global downturn, is the worst in decades. And emerging economies are contracting at a pace few had predicted just months ago. Even China, whose economy still is growing at a 6.8 percent annual pace, is grappling with vast numbers of the unemployed, raising fears of unrest.

[Markets in Asia and Europe continued to fall on Wednesday. U.S. futures were trading higher, in advance of President Obama's announcement of a housing recovery plan.]

The sharpness of the global slowdown has alarmed economists, who see no obvious engine for recovery.

"Most Western developed economies are going to see the deepest downturn they've seen in a number of decades, in some cases possibly since the Second World War," said Jonathan Loynes, chief European economist at Capital Economics, an independent consultancy in London. "If you go back six months or so . . . there was a hope that some parts of the world will escape the downturn from the U.S. economy and that would help to support the global economy as a whole. And that hope has now faded. We're seeing a downturn in virtually every area of the world."

The Dow Jones industrial average declined nearly 300 points yesterday to finish close to its lowest level of the financial crisis. Fearful investors piled into safe-haven investments such as U.S. Treasurys and gold. Bank stocks plunged worldwide, reflecting waning faith in their ability to hold up in a deteriorating global economic landscape and growing concern over the lack of a coordinated plan to clear the financial system of toxic mortgage assets.

The sell-off came despite the signing of the $787 billion stimulus package by President Obama and as auto executives faced a deadline to submit restructuring plans to the federal government after receiving billions in bailout money.

After a three-day weekend, investors digested dire news Tuesday from countries that were supposed to help lift the world economy out of its downward spiral. The pace of decline in these countries exceeded expectations of even the gloomiest experts, illustrating the depth and breadth of this rare global swoon.

Japan's economy, the world's second-biggest, after only the United States, shrank at an annual rate of 12.7 percent during the last three months of 2008 -- the biggest contraction since the oil crisis of the mid-1970s. The British economy, damaged by the credit crisis, will contract at 3.3 percent, almost twice as much as predicted three months ago, according to the country's biggest business lobbying organization. Those two pieces of data, released Monday, came on the heels of a report Friday showing that the German economy, Europe's largest, shrank by 2.1 percent, the steepest drop since the country's reunification in 1990.

Some economists had argued that countries like Japan and Germany were better equipped to weather the downturn. Germany has little consumer debt, and Japan's banks are in better shape after the banking crisis of the 1990s. But their economies rely heavily on exports, and global demand for items such as Japanese and German cars has evaporated.

[In Europe, markets were falling again on Wednesday, after Germany's benchmark DAX index dropped 3.4 percent Tuesday and London's FTSE index declined 2.4 percent. In Japan, the Nikkei slid 1.5 percent Wednesday, after falling 1.4 percent Tuesday. Taiwan's government slashed its economic forecast Wednesday, predicting the island's economy will shrink 3 percent this year amid plunging exports, the Associated Press reported. To spur growth, the central bank moved quickly to cut interest rates for the seventh time since September.]

Helping to drive European markets lower on Tuesday was a report from Moody's Investors Service warning that Western banks with exposure to Eastern Europe could face credit downgrades. The fear is that the emerging parts of Europe, which had grown rapidly by relying on capital flowing in from the West, are in for a hard landing. The euro fell, as did bank stocks.

Meanwhile, emerging markets, the world's fastest-growing economies, whose demand for goods and services is considered key to a global recovery, showed signs of intensifying weakness. Russia's state-owned news agency said Tuesday that lower commodity prices and the financial crisis are expected to cause the economy to shrink by more than 2 percent this year. In Brazil, where commodity exports have fallen sharply, retail sales in December fell for the third straight month, marking the longest period of declines in six years, a report released Tuesday showed.

In Mexico, the government was forced to intervene in the foreign exchange market after the peso reached an all-time low against the dollar. In China, slumping demand for exports has trimmed the growth of its powerful economy to nearly half its 13 percent pace in 2007.

"Manufacturing, construction, financial services, non-financial, retail -- wherever you look, you see a complete collapse in demand," said Julian Callow, an economist at Barclays Capital in London. "It really is like the floor has come out of confidence in global economic demand."

On Tuesday, the head of the International Monetary Fund urged countries to coordinate their economic stimulus efforts, saying he was "not optimistic" about the world economy.

"Today, the house is burning . . . so we have to act as firefighters," Dominique Strauss-Kahn said on French radio, the Associated Press reported.

In the United States, the sobering news from abroad was coupled with worry about the viability of the auto and banking industry and doubt about just how much the $787 billion stimulus package would be able to revive the economy.

Financial stocks led U.S. markets lower Tuesday, with Bank of America, Citigroup and J.P. Morgan Chase each declining by 12 percent. Also hurting were auto stocks, with executives at General Motors and Chrysler facing deadlines to turn in restructuring plans to the federal government after receiving billions of dollars in bailout funds and seeking billions more. GM's stock was down almost 13 percent.

A report by the Federal Reserve Bank of New York that its general business conditions index in that region fell to a new low of minus-34.7 also weighed down markets.

Also on Tuesday, the Treasury Department released data showing that lending at banks that received government funds had declined.

With all but one of its 30 components finishing in the red, the Dow closed down 297.81 points, or 3.8 percent, to 7552.60, within 300 points of the market bottom reached Oct. 9, 2002, after the bursting of the tech bubble. The lone bright spot was Wal-Mart, whose fourth-quarter profit fell less than expected.

The Standard & Poor's 500-stock index, a broader market measure, closed down 4.6 percent, below the psychologically important 800 mark, causing some traders to predict an avalanche of selling that could test new market lows. The tech-heavy Nasdaq composite index fell 4.2 percent, to 1470.66.