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Economic uncertainty spreads

(Agencies)
Updated: 2008-10-11 16:21

And that is why government actions - from the $700 billion bank bailout in the United States to the coordinated cutting of interest rates by central banks this week - have had little effect on freeing up money and getting banks to lend to each other or their customers.

Mr. Cooper said, for instance, that easing the cost of credit would not make Barclays clients more creditworthy in a downturn. "It's not just about the cost of funds. Credit is risk-weighted and the risk in the economy is not necessarily changed by this," he said.

Many businesses have already started to retrench, like the European auto industry.

Volvo said it would eliminate 2,700 jobs in Sweden and 600 more abroad in response to what it called the "rapidly deteriorating market situation." Opel, the German subsidiary of General Motors, temporarily shut down two plants because of a steep falloff in demand.

Carlos Ghosn, the chief executive of Renault, said this week that the credit crisis left him with no choice but to start hoarding money. He predicted a “prolonged and strong” recession.

"We have to be very cautious in the use of cash by slowing down investments, reducing inventories and activities," Mr. Ghosn said. "That means losses, and this will add to the financial burden."

Many economists see a recession as inevitable now. Several factors will decide how widespread it is, how painful it is and how long it lasts.

There is still the possibility that some confidence could be restored if leaders meeting in Washington over the weekend come up with a cohesive plan, in particular, one that involves government insurance of bank deposits or interbank lending.

The other hope is consumers. If European or American consumers keep spending, that too could stave off the worst of a downturn. But Americans have slowed their spending, and retailers expect a dismal holiday shopping season. And the downward spiral of financial events since the bankruptcy of Lehman Brothers has eviscerated European business and consumer confidence.

If Asia can move from an export-driven economy to a consumption-driven economy, it could keep Asian factories chugging along and perhaps generate demand for American and European exports. But Asians are used to saving, not consuming.

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