Global Economic Confidence Plunged on Concerns About Recession

By Brian Swint

Oct. 16 (Bloomberg) -- Confidence in the world economy tumbled in October after a deepening freeze in financial markets increased the chances of a recession, a survey of Bloomberg users on six continents showed.

The Bloomberg Professional Global Confidence Index fell to 4 from 11.3 in September, the lowest reading since the survey started in November. Sentiment dropped the most in Asia and Europe and was weakest in Japan. The results reflect responses from 3,764 Bloomberg users in more than 100 countries.

Stock markets plunged the most since at least 1970 last week as concerns about a potential collapse of the banking system reverberated through the world economy. That's sapping confidence just as the U.S. and Europe hurtle toward recession, forcing central banks to slash interest rates in tandem and governments to rescue financial institutions.


``We're going to see a repeat of the 1987 dynamic after the stock market crash where business confidence fell sharply and you saw a significant retrenchment in business investment as a result,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong.

Bloomberg users from Dubai to New York posted responses to the survey between Oct. 6 and Oct. 10 after the U.S. Congress's decision to approve a $700 billion rescue plan for banks. The U.K. unveiled plans to buy stakes in banks as well as lending guarantees on Oct. 8. The survey didn't reflect a decision by euro-region governments on Oct. 12 to back similar measures.

Country Economies

When asked about their own economies, British respondents were the most pessimistic, with the index falling to 3 from 5.7. The U.S. reading declined to 5.1 from 15.2 and a gauge of Japanese confidence slipped to 5.4 from 7. While Brazilian users were the most optimistic, its index still plunged the most for any country, falling 32 points to 26.2.

The credit squeeze, which worsened after the collapse of Lehman Brothers Holdings Inc. last month, is dragging down a global economy already hit by a record surge in oil prices this year. U.S. employers cut the most jobs in five years in September, while confidence among Japanese consumers and German investors are both close to record lows.

``On top of the financial crisis, we're likely to see spillovers into the real sector,'' said Alvin Liew, an economist at Standard Chartered Plc in Singapore who took part in the survey. ``If this slowdown is a protracted one, that would have knock-on impact on domestic demand as well.''

IMF Estimates

The International Monetary Fund last week forecast that global growth will slow to 3 percent in 2009, from 3.9 percent this year and 5 percent in 2007. That would mean a world recession under the fund's informal definition.

Respondents in all countries except Brazil were more confident their central banks would cut rates, the survey showed, with U.K. users expecting the biggest declines. The Bank of England's benchmark rate of 4.5 percent is still the highest among the Group of Seven nations even after last week's 50 basis point reduction.

The MSCI World Index, which fell 20 percent last week, has since rebounded after euro region nations committed 1.3 trillion euros ($1.8 trillion) to guarantee bank loans and take stakes in lenders. Treasury Secretary Henry Paulson said this week he plans to use $250 billion of taxpayer funds to purchase stakes in thousands of financial firms, while central banks are slashing rates and flooding the financial system with cash.

The measures may be starting to work. The rate banks charge each other to borrow dollars for three months fell for a third day yesterday, declining 9 basis points to 4.55 percent, according to the British Bankers' Association. The one-week rate fell to 3.83 percent from 4.08 percent on Oct. 13.

``The various rescue packages have essentially prevented something bad from turning into something much worse,'' said Nariman Behravesh, chief economist at Global Insight Inc., a Lexington, Massachusetts, forecasting firm. Still, ``the U.S., Europe and Japan are all headed to a recession. The credit crunch has hit them equally hard.''

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.