Gloom reigns as US recovery slows

WASHINGTON (AFP) – World markets were thrown into turmoil as investors worried that US growth — a key engine of the global economy — is coming coughing and spluttering to a halt.

Investors from New York to Tokyo poured money into safer assets after the Federal Reserve warned the US recovery would be “more modest” than expected.

In an effort to bolster market confidence the central bank on Tuesday announced a return to crisis-era stimulus spending. But the policy shift was seen more like a plumb line that revealed the depths of the Fed’s concerns.

“Investors are now rightly questioning the strength and sustainability of the recovery,” said Joseph LaVorgna, Deutsche Bank’s chief US economist.

And question they did. In New York the benchmark Dow index of 30 leading companies fell around 2.5 percent, its worst drop in nearly a month.

Individual US companies shed millions of dollars in value, continuing a downward trend seen in Asian and European bourses earlier in the day.

“Global equity markets were pummeled,” said Sam Stovall of Standard & Poor’s Equity Research, pointing to gloomy US trade data that darkened the mood further.

The US Commerce Department reported that imports to the United States increased by three percent in June, draining billions of dollars out of the US economy.

“This is spectacularly terrible,” said Ian Shepherdson of High Frequency Economics, explaining that rising imports will eat into already anemic domestic growth.

That was enough to prompt analysts to slash growth forecasts across the board.

Deutsche Bank’s LaVorgna predicted US growth in this quarter would be limited to three percent, well down from the 4.6 percent previously forecast and raising doubts that sky-high unemployment can be trimmed soon.

Other economists made similar calls, slashing past estimates as well as predictions running deep into next year.

It is “bad news for real GDP growth in the US, which will be further reduced by the effects of rising imports,” said Christopher Cornell of Moody’s Economy.com.

News from China and Europe did little to settle nerves.

In China, key indicators showed the world’s third-largest economy was slowing after the government moved to wind back massive stimulus spending, close inefficient factories, and curb soaring property prices and bank lending.

Analysts said the data added to mounting evidence that the Chinese economy was losing steam as the government aims to avoid overheating in the red-hot economy.

“I think the picture is pretty clear that the entire economy is slowing,” Ken Peng, a Beijing-based economist for Citigroup, told AFP.

In London, the Bank of England cut its economic growth forecasts, predicting gross domestic product (GDP) growth would average about three percent over the next three years.

That was lower than the previous estimate of between 3.0-4.0 percent in May, owing partly to the impact of the government’s recent austerity budget that was aimed at slashing the public deficit.

“The onslaught of negative news prompted a worldwide sell-off,” said Elizabeth Harrow of Schaeffer’s Investment Research.