Stimulus plans must target low income earners: OECD

By James Mackenzie

PARIS (Reuters) - Government stimulus packages aimed at combating the worst recession in decades should focus on getting cash to low-income earners who are more likely to spend it than hoard savings, the OECD's chief economist said.

"In the current juncture we need a lot of immediate effectiveness in terms of hitting consumers directly, now," the think tank's chief economist Klaus Schmidt-Hebbel told Reuters.

"I think the most effective way is to put money into the hands of consumers, particularly low and middle-income consumers who are likely to spend a higher fraction of the check they get in the mail than higher-income households," he said.

Governments around the world have been looking at huge stimulus packages aimed at protecting key industries and heading off a deadly mix of rising unemployment, shrinking demand and slumping output. Britain announced its plan on Monday.

In its Economic Outlook published on Tuesday, the Organisation for Economic Cooperation and Development said members of the 30-nation group faced the most serious recession since the early 1980s and governments had to offer additional stimulus measures.

Schmidt-Hebbel said cuts in value-added tax, such as those in the British stimulus package, were not as likely to give the direct boost needed as they helped both low-income earners and the better-off who were more likely to put extra cash aside.

"So it's less targeted and therefore probably less effective than tax breaks targeted at lower income groups," he said.

"TARGETED, TIMELY, TEMPORARY"

The OECD said the crisis was likely to add another 8 million people to jobless rolls over the next two years as employers from banks to carmakers slash payrolls to cut costs.

Britain plans to borrow billions of pounds to fund tax cuts and spending, and President-Elect Barack Obama said a big stimulus jolt was needed to bring the U.S. economy back into shape.

But Schmidt-Hebbel said stimulus measures had to be applied correctly if they were to be effective, and it had to be made clear from the start that they would be rolled back once economies began to recover.

"These measures should not only be timely -- meaning now, not only targeted -- meaning to those (lower-income) groups, but also they should be temporary, particularly in those countries where the initial fiscal situation is pretty bad to start with, like the United States," he said.

It was important to ensure that the strained budget positions in many countries were not overloaded by open-ended spending programs.

"They should be taken with a strong commitment that they are put in place as long as they are needed to address the recession and to kick start a recovery but there should be a very strong upfront commitment that they will be withdrawn or unwound as conditions improve," he said.

The same problem applied to major infrastructure projects, which some commentators have suggested would provide a more effective long-term boost to the economy.

"The disadvantage with infrastructure investment is that it sometimes takes a long time to be brought on stream and once begun it is difficult to wind down in line with the recovery in activity in, let's say, two years from now," Schmidt-Hebbel said.

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Hong Kong shares rise 3.4 pct in global rally

* HK shares pare gains amid flat China market

* Investors concerned about volatility on Tuesday

* Commodity stocks surge as oil, gold rally for second day

* ICBC up after Goldman Sachs adds it to conviction buy list

* Hutch Telecom drops as investors exit after dividend payout

(Updates to close)

By Parvathy Ullatil

HONG KONG, Nov 25 (Reuters) - Hong Kong shares rose 3.4 percent on Tuesday after Wall Street gave a resounding thumbs up to the government's decision to rescue Citigroup, while resurgent oil prices helped energy stocks to notch up big gains.

But some investors raised concerns over sharp swings in share prices during the 10-minute closing auction, ahead of the quarterly rebalancing in the MSCI Barra indices. Last week, market regulators warned investors about share price and turnover volatility during the MSCI index readjustment which becomes effective on Nov.25. [ID:nHKG372977]

"Stocks that are removed from the index are sold down sharply and those that are added are marked at a premium during the closing auction supporting speculation and share price manipulation," said Andrew To, sales director with Tai Fook Securities.

"This is a bit like playing in a casino and gives long term investors an uneasy feeling."

Two local brokers cited China Southern Airlines (1055.HK: Quote, Profile, Research, Stock Buzz), which fell 8.8 percent during the closing auction to take the day's total losses to 12.6 percent, and China Eastern (0670.HK: Quote, Profile, Research, Stock Buzz), down 11 percent, as examples of shares heavily offloaded in the final 10-minute window.

China's top lender, ICBC (1398.HK: Quote, Profile, Research, Stock Buzz), surged 9.3 percent after Goldman Sachs added it to its conviction buy list, citing its lower risk profile and less net interest margin pressure than its peers.

The benchmark Hang Seng Index .HSI ended 420.66 points higher at 12,878.60 after rallying above 13,000 points earlier.

Other regional markets also rose, but a drop in the mainland bourses limited gains in the local market.

"We were waiting for an indication from Wall Street on how the Citi bailout should be received, as the local interpretation of the rescue is quite different from what U.S. investors think," said Y.K. Chan, strategist with Phillip Capital Management.

Hong Kong shares fell on Monday as the anticipated Citigroup bailout plan failed to ignite buying, but U.S. stocks surged as the plan eased investor concerns over the financial sector.

Chan added, however, that overall weakness in the economy had limited gains and the market could still fall below its October low in the absence of new stimulus steps from the U.S. and China.

Mainboard turnover rose to HK$41.2 billion from HK$35 billion on Monday.

CNOOC (0883.HK: Quote, Profile, Research, Stock Buzz) pared gains to 6.6 percent after jumping more than 10 percent earlier as the overnight rally in oil prices lost momentum in Asian trade Tuesday.

Asia's largest oil and gas producer, PetroChina (0857.HK: Quote, Profile, Research, Stock Buzz), gained 4.9 percent, while top refiner Sinopec Corp (0386.HK: Quote, Profile, Research, Stock Buzz) added 4.2 percent.

The China Enterprises Index of top locally listed mainland Chinese firms .HSCE rose 4.4 percent to 6,658.00.

Hutchison Telecommunications (2332.HK: Quote, Profile, Research, Stock Buzz) slid 16.7 percent from its ex-dividend share price of HK$2.28, as investors exited shares in the company amid the absence of any major expansion plans in the short term following its exit from India.

The stock finished Monday at HK$9.28 and was adjusted for the special dividend payout resulting for the sale of its stake in Indian mobile firm Hutchison Essar last year, bringing its share price to HK$2.28. It closed 5.7 percent lower at HK$2.15.

(Reporting by Parvathy Ullatil; Editing by Nick Macfie)

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European stocks hit day's high on Fed move

LONDON, Nov 25 (Reuters) - European stocks hit their day's high on Tuesday after the U.S. Federal Reserve announced a $600 billion programme to buy mortgage-related debt and securities and a $200 billion facility to support consumer debt securities.

At 1339 GMT, the FTSEurofirst 300 .FTEU3 index of top European shares was up 2.2 percent at its day high of 846.88 points.

U.S. stock index futures SPc1 DJc1 NDc1 rose 0.9-2.5 percent.

Banks and oil stocks added most points to the European benchmark, with BP (BP.L: Quote, Profile, Research, Stock Buzz) up 5.1 percent as the top weighted gainer.

Miner BHP Billiton (BLT.L: Quote, Profile, Research, Stock Buzz) soared 17 percent after dropping its bid for Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz).

(Reporting by Sitaraman Shankar)

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FTSE up 1 pct as bank gains help sustain recovery

* FTSE 100 gains 1 percent

* Miners slide following collapse of BHP Billiton, Rio deal

* Financials continue recovery

By Simon Falush

LONDON, Nov 25 (Reuters) - Britain's top share index rose 1 percent by midday on Tuesday with gains in embattled financials outweighing a slide in resources as the world's top miner, BHP Billiton (BLT.L: Quote, Profile, Research, Stock Buzz), dropped its hostile bid for Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz).

The benchmark's rise added to the record gains posted the previous session, as investor anxiety about the financial sector eased slightly. By 1128 GMT, the FTSE 100 .FTSE had gained 29.25 points to 4,192.21 after a record 9.8 percent gain the previous session.

Banks, which have fallen some 56 percent this year .FTNMX8350, hammered by their exposure to the ailing credit market, recovered some of their losses as investors looked to pick up cheap assets.

"Lot's of stocks were oversold and as happened after previous sell-offs, there's been a bit of a bounce," said Colin McLean, managing director at SVM Asset Management in Edinburgh.

He said measures to boost the UK economy announced on Monday in the pre-budget report -- including cutting value-added tax to 15 percent, from 17.5 percent -- would benefit banks like HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) and Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) as they are heavily exposed to the UK consumer.

Lloyds TSB added 9.1 percent and HBOS gained 6.6 percent, while Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) firmed 6.9 percent.

Other financial stocks also rose, with Man Group (EMG.L: Quote, Profile, Research, Stock Buzz) gaining 4.6 percent and Schroders (SDR.L: Quote, Profile, Research, Stock Buzz) adding 10.2 percent.

MINERS SLIDE

Mining stocks were the biggest fallers as the collapse of the BHP Billiton Rio deal highlighted the problems of deteriorating demand which have hammered the sector in recent months.

While BHP Billiton gained 16.2 percent on relief it is not bidding, Rio Tinto shares fell 35.4 percent, leading other miners lower.

Eurasian Natural Resources (ENRC.L: Quote, Profile, Research, Stock Buzz), Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz), and Lonmin (LMI.L: Quote, Profile, Research, Stock Buzz) lost between 2.6 percent and 4.8 percent.

The World Bank said China's growth could well slow to its weakest pace in almost two decades next year, the latest grim prognosis for a global economy buckling despite the concerted efforts of policymakers. [ID:nSP381382]

What started more than a year ago as a meltdown in the U.S. market for high-risk mortgages has engulfed the world, freezing access to credit, sparking bank collapses and requiring the financial bailout of entire countries.

"The fundamentals have not changed, corporate earnings still look fairly weak, so yesterday's increase should be seen as a bear market rally," said Richard Hunter, head of equities at Hargreaves Lansdown.

Shares in BT Group (BT.L: Quote, Profile, Research, Stock Buzz) slid 2.1 percent after Merrill Lynch cut its rating to "neutral" from "buy" and reduced its price target, saying the telecoms company is increasingly exposed to the sharp slowdown in UK consumer and corporate spending.

Shares in Wolseley (WOS.L: Quote, Profile, Research, Stock Buzz), the British plumbing and heating supplies company, fell 5.1 percent as RBS cut its rating to "sell" from "hold", and reduced its target price to 224 pence from 300 pence. (Editing by Andrew Macdonald)

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Can We Muster a 2-day Stock Rally?

Daily Forex Fundamentals | Written by Black Swan Capital | Nov 25 08 14:07 GMT |

Currency Currents Key News The World Bank on Tuesday cut its growth forecast for China next year to 7.5 per cent, the slowest rate of expansion since 1990, and said the impact of the global financial crisis was likely to "intensify". (FT) [UK] Prime Minister Gordon Brown swept aside three decades of economic orthodoxy with tax increases on the rich and plans that will double Britain's national debt. Key Reports Due (WSJ): 7:45a.m. ICSC Chain Store Sales Index For Nov 22: Previous: +0.3%. 8:30a.m. 3Q Preliminary GDP: Previous: -0.3%. 8:30a.m. 3Q Preliminary Corporate Profits: Previous: -0.4%. 8:55a.m. Redbook Retail Sales Index For Nov 22: Previous: -1.1%. 9:00a.m. Sep S&P/Case Shiller Home Price Index: Previous: -17.7%. 10:00a.m. Nov Conference Board Consumer Confidence: Expected: 38.5. Previous: 38.0 10:00a.m. Nov Richmond Fed Mfg Survey: Previous: -26. 10:30a.m. Nov Dallas Fed Mfg Production Index: Previous: -13.7. 5:00p.m. ABC/Wash Post Consumer Conf For Nov 22: Previous: -52. Quotable "The government is unresponsive to the needs of the little man. Under 5'7", it is impossible to get your congressman on the phone." Woody Allen FX Trading – Can We Muster a 2-day Stock Rally? Yesterday looked like another day foreshadowing a decent dollar correction on the bounce higher in stocks. This morning we wake to a stronger dollar again... .hmmm... and of course "new" concerns about stocks, one story we saw read. We bit on the dollar move yesterday, expecting at least a 2-day ebb in risk aversion, playing for a short-term correction. That view isn't looking as good today as it was yesterday It all keeps coming back to the stock market - the key risk asset class; currencies are joined at its hip. S&P 500 Index vs. EURUSD 240-min (Nov 3-25): When I played baseball and was in a batting slump (which was often), I would consider a foul ball and hit-by-pitch (taking one for the team) a hitting streak; but to qualify in my mind as a streak, the sequence had to come after two consecutive plate appearances. If the stock market could muster two-days higher in a row I'm sure traders would consider that a streak. I know Tout TV would. Yikes! Every seeming glimmer of perceived good news is quickly dashed by more and more bad of late. But, the question is, and always is, how much of the bad is discounted into the price? The collective thing we call the market is the arbiter of news and reflects that in price action. And if Mr. Market perceives bad news as "a little less bad," that's all he needs sometime to stage a rally. Stay tuned. A streak is on the line. Reader Q&A: Dear Mr. Crooks, Q: I've read all of your articles ...But, I can't get my arms around your fundamental bullish view of the dollar. Am I missing something? There have been 2 real cases of DEFLATION in our lifetimes: 1) US Great Depression. 2) Japan 1990s. In both instances they were CREDITOR nations. No MASSIVE interest bill on debt (with declining income to pay). They had reserves and surplus cash on hand which led to hoarding and deflation. You can't hoard (deflate) when you have no savings. Gold and Silver: This comes down to the inflation/deflation argument. I do not equate short term liquidation/deleveraging with deflation. Debtors will always have to print money to pay debt and (sooner or later) increase interest rates and attract purchasers of their debt respectively. If they don't print money (inflationary), then they can't pay the interest on their treasuries. If the US defaults on its bonds, Gold will go to $3,000/oz+. Since it is unlikely the US Treasury will default, it simply means they will keep issuing debt (treasuries) to pay the bills and raising interest rates to continue to attract capital (after the ‘flight to safety' panic mitigates). With a declining GDP, no matter how much they tax us, they will not raise enough cash to pay interest on the debt. They will print more money to pay their creditors. They is hugely inflationary. In the short term, dollar strengthens only because as people liquidate assets they convert to dollars and treasuries for safety. Second, as a fed chairman, if people will not spend, how do you get them to in order to stimulate the economy? You devalue what they are hoarding. It is very hard to hold onto something that is dropping in value weekly – as we are finding with housing. Same will hold true for the dollar. The fact that the dollar has artificially strengthened dramatically and gold/silver have relatively held their ground (i.e. the dollar has gained more than gold/silver has dropped – percentage wise) means it's a net move up for gold/silver. For example: If two months ago, $2.00 bought 1 British Pound and now $1.50 buys 1 British Pound, this means the dollar has gained 25%. If GLD and SLV dropped from $85 to $75 and $12 to $10, they have dropped between 12-20%. This means you gained a relative purchasing power of at least 5%. i.e. The $75 you would gain today by selling one share of GLD will purchase more than the $85 of two months ago. Here's what is interesting. In the last few days, the dollar has strengthened AND Gold and Silver have moved up. This is doubly bullish for metals. Could GLD and SLV go to $60 and $8 per share before increasing to $100+ and $15+ respectively? Yes. Do I think they will? No. Your comments are appreciated. I am open to the possibility that I have a big blind spot in my argument... A: Dear Mr. Reader... First let me say that no doubt this is an extremely ugly and precarious situation facing the US. We have no allusion about the danger here, or pretend the US is good shape. But because our analysis is of the currency, and how to try to profit from it; the economic analysis that we do always has to be a "relative" game. And we think, despite the problems, the US is relatively better off than its key competitors in the major and emerging currency sphere. Ultimately the currency game is about trying to determine the underlying flow of global capital. And in this environment, because of risk and because the US plays the role of reserve currency, it wins in this environment... a deflationary environment. We don't quite know why a creditor vs. debtor country matters in a global deflationary environment? The amount of once "productive capital" in the world that stimulated demand for goods was a big driver in bidding up inflation. The supply of real stuff lagged as China demand surged. This, coupled with massive dollar-based liquidity thanks to 1% interest rates at the Fed and ECB in 2002 and 0.25% from the BOJ, ensured "free" money and was the key driver of trillions in derivatives, i.e. dollar-based credit. We have a situation where this once seemingly "productive" capital, which was really malinvestment (in the Austrian School terminology), is being destroyed - that is deflationary as demand is sagging. In addition, because this capital (granted - derivative credit) is disappearing around the globe, it reduces the supply of dollars in the system (one can see that by the improvement of the US current account deficit). And yet the demand for these dollar-based credits is rising a la the emerging economies that have no domestic source of capital funding and were reliant primarily on international banks and foreign direct investment. We think this great unwind could last years, not months. If so, that should be a major deflationary event. We have always looked at gold as another asset class, and do not attribute a great role to gold in a world driven primarily by credit. We see it as the reflection of the world's money - the US dollar. If the dollar weakens, gold must maintain its purchasing power against a real international basket of goods ... as gold does play that role as maintaining its purchasing power against real stuff. Gold has rallied in this cycle very tightly with the other asset classes that were dollar-based credit driven, i.e. a liquidity move. So, if we are right on the dollar, we think gold enters a bear market. As you astutely observe, the correlation between gold and the dollar isn't always tight; it can decouple. And gold may start to play the fear role; we are not sure and are very open to that possibility. If it does finally start playing that role, it will likely go a lot higher. But it was definitely not the place to be during this near financial Armageddon. The gold bugs got everything they wanted and yet their strategy of buying gold and selling the dollar has backfired so far. We think this proves the role the reserve currency plays at times like these, and suggest to us the gold market is a liquidity animal and not very important to the major players around the globe, i.e. those that have to hide big pools of capital. We think the dollar strength will surprise, not just because of this fear move. Here are just a couple of reasons. US is still more flexible in labor. US is still more flexible in monetary and fiscal matters. US will likely emerge from this faster, i.e. Europe is behind on the business cycle standpoint. (This is why the dollar usually does better than the other major currencies during recession -- 4 of the last 5 recessions the dollar has outperformed.) European banking has massive exposure that has not yet "hit the fan" so to speak. If the emerging markets breakdown in a big way, it could mean players begin to question the European Monetary System. That would be very bad for the euro, the key dollar competitor. US dollar world reserve currency status has not been challenged in this cycle; that is solidly intact. We disagree this dollar move is "artificial" in any way. It is driven by global macro factors and we think the ongoing sea change in the global economy marks the dollar bottom in this cycle. Now, all that said is our story. If risk appetite returns and industrial production ticks higher and China grows rapidly again and emerging economies start exporting again, etc ... then our view will be proven wrong and liquidity returns and liquidity-driven asset classes go higher as dollar-based credit flows again. We know WE are missing something. There is much going on under the surface of the economy that we don't see, i.e. our standard analysis can't pickup. So, we are always open to be very wrong no matter how confident we might be about the fundamentals. Price is the final arbiter that will tell us we are wrong. So, we watch and constantly ask ourselves that question as we do our homework: Where are we wrong? Thank you for your excellent question and hope our response makes some sense. Jack Crooks Black Swan Capital http://www.blackswantrading.com Black Swan Capital's Currency Snapshot is strictly an informational publication and does not provide individual, customized investment advice. The money you allocate to futures or forex should be strictly the money you can afford to risk. Detailed disclaimer can be found at http://www.blackswantrading.com/disclaimer.html

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US STOCKS-Futures flat as caution offsets stimulus bets

* Home price index, Q3 GDP data, consumer confidence eyed

* Treasury's Paulson to unveil consumer credit plan

* General Motors' loss view widened at JPMorgan

* For up-to-the-minute market news, please click on STXNEWS/US

By Ellis Mnyandu

NEW YORK, Nov 25 (Reuters) - U.S. stock index futures were little changed on Tuesday as caution before economic reports offset hopes that government plans to stimulate lending and revive growth will help avert a deep economic downturn.

U.S. Treasury Secretary Henry Paulson plans to announce on Tuesday the formation of a program to increase the availability of auto loans, student loans and credit cards, the Wall Street Journal reported, citing people familiar with the matter. For details, see [ID:nBNG425002]

Also high on the agenda is a slew of data, including revised figures on third-quarter gross domestic product, likely to show the economy contracted further as the credit crisis and fallout from rising unemployment took their toll.

The U.S. economy is expected to shrink 0.5 percent in the third quarter, revised from an initial government reading that showed a 0.3 percent contraction.

"We've had two solid days of gains, and most of the economic news is widely expected to be quite negative," said Peter Cardillo, chief market economist at Avalon Partners in New York.

"So I expect a consolidation day, with an upside bias. It looks as though stimulus packages are gaining ground throughout the global economy and that, of course, will ease fears of a deepening contraction in economic activity."

S&P 500 futures SPc1 slipped 1.50 points and were slightly below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures DJc1 shed 19 points, and Nasdaq 100 NDc1 futures gained 6.50 points.

Expectations for a second U.S. economic stimulus plan gained more traction on Monday when President-elect Barack Obama said the economy was in need of a stimulus "significant enough that it really gives a jolt to the economy." He did not put a price tag on the two-year stimulus proposal, which other Democrats have estimated as high as $700 billion.

In Europe, French President Nicolas Sarkozy said France will launch a "quite massive" stimulus plan to revive the flagging economy in the next 10 days.

The lending facility to be unveiled by Paulson will be operated by the Federal Reserve, and it is expected to provide loans to investors who want to buy securities backed by credit cards, auto loans and student loans, according to the Journal. [ID:nBNG425002]

In stock research news, JPMorgan widened its 2009 loss per share forecast for General Motors (GM.N: Quote, Profile, Research, Stock Buzz) to $25.25 from $22.

The GDP report is due at 8:30 a.m. (1330 GMT), followed by the S&P/Case-Shiller home price index for September at 9 a.m. (1400 GMT), while a reading on November consumer confidence is due at 10 a.m. (1500 GMT)

U.S. stocks soared on Monday, capping the best two-day run since the aftermath of the 1987 stock market crash, as the government's decision to rescue Citigroup (C.N: Quote, Profile, Research, Stock Buzz) spurred an enormous relief rally.

(Editing by Kenneth Barry)

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Majors Fall Back

Daily Forex Fundamentals | Written by Crown Forex | Nov 25 08 13:36 GMT |

The U.S. dollar rose back against majors today in an intraday correctional wave as currencies rose heavily yesterday against the dollar after Citigroup announced the U.S. government will guarantee $306 in bad assets in addition to a $20 billion capital injection, stocks accordingly rose heavily which boosted the appeal for carry trades yesterday. Today the U.S. will release a set of data from growth to confidence while Mr. Paulson is expected to announce new measures to help boost consumer financing after opting to change his initial plan of buying troubled assets from banks and financial institutions. The Euro recorded today a high of 1.2915 and a low of 1.2803 in thin trading so far despite the better than expected GFK confidence report from Germany, the pair faces a strong resistance level at 1.2904 which is holding the pair so far today, while the support can be located at 1.2794 which if breached will open the way for the pair to drop back to the 1.2687 support level. The British Pound also fell against the U.S. dollar as the pair recorded a high of 1.5163 and fell down to set an intraday low so far at 1.4982, the pair rebounded from the 1.5170 resistance level and managed to breach the 76.4% correctional level at 1.5056 which opened the way for further drops that might extend to reach the $1.48 levels, however breaching the 1.5056 would provide the pair with strong upside momentum to retest the 1.5170 resistance. The U.S. dollar dropped back against the Japanese Yen today as investors reduced their carry trade bets during the European session as stocks dropped back, the USD/JPY recorded a high of 96.94 and a low of 95.64, the pair failed to breach the resistance level at 96.84 which pushed it back to the 95.72 support level and the pair's movement remains restricted among those two levels so far today. Crown Forex disclaimer:The above may contain information for investors/traders and is not a recommendation to buy or sell currencies, gold, silver & energies, nor an offer to buy or sell currencies, gold, silver & energies. The information provided is obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. I am not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trading currencies, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, gold, silver &energies presented should be considered speculative with a high degree of volatility and risk.

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Canadian Retail Sales Surge 1.1% in September Despite the Dour Outlook Held by the BoC

Daily Forex Fundamentals | Written by DailyFX | Nov 25 08 13:58 GMT |

Retail spending in Canada increased 1.1% in September despite expectations for a 0.4% increase. In addition, retail sales excluding the volatile automotive component increased 0.8%, which beat estimates for a 0.2% gain. The breakdown of the report showed that five of the eight categories increased during the month, but the improvement could be short-lived as the Bank of Canada expects economic activity to weaken throughout the next year. Mounting growth fears led the BoC to lower the benchmark interest rate by 75bp to 2.25% from 3.00%, and may continue to ease policy further as growth prospects deteriorate. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

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Brown Takes U.K. ‘Back to the 70s’ With Debt Plans

By Gonzalo Vina

Nov. 25 (Bloomberg) -- Prime Minister Gordon Brown swept aside three decades of economic orthodoxy with tax increases on the rich and plans that will double Britain’s national debt.

Brown’s proposals yesterday to mitigate fallout from the global economic slump would cost 25.6 billion pounds ($38.7 billion) in the U.K.’s biggest round of stimulus since 1988.

The plan, which will result in the largest budget deficit among the Group of Seven industrialized nations, represents a retreat from policies that have shaped the British economy since Conservative Margaret Thatcher’s 12-year tenure that began in 1979. Brown’s predecessor Tony Blair called himself a proponent of “New Labour” and advocated policies Thatcher had promoted, including spending restraint, low debt and tax cuts for the rich.

“It is back to the 70s,” said Bill Jones, a political scientist at the University of Manchester. “It’s a return to the two-party divide and a temporary end to consensus politics. It’s like Labour has suddenly burst out of its straitjacket.”

Labour’s traditional union supporters backed the proposal by Brown, 57, to impose a new 45 percent tax on those earning more than 150,000 pounds a year, while opposition Conservatives accused him of irresponsibility for running up debt that will exceed 1 trillion pounds by 2014.

‘Warm-Up Exercise’

“This is a welcome warm-up exercise after 30 years of inaction and neo-liberal economics,” said Derek Simpson, joint general secretary of Britain’s largest trade union, Unite, which represents 2 million workers. “Gordon Brown has thrown off the shackles of New Labour to reveal the real Labour.”

For a decade under Blair, Labour pledged not to raise income tax rates to reassure voters that it had abandoned its traditional dogmas and supported people making money.

When Labour was previously in power, in the late 1970s under James Callaghan, the top rate of tax was 83 percent on earned income and 98 percent on unearned income. These rates were cut to 60 percent and 75 percent when Thatcher took office.

Britain isn’t alone in the shift from Thatcher-style policies that helped underpin a two-decade bull run in global stocks.

Obama’s Plans

U.S. President-elect Barack Obama, 47, said he aims to create 2.5 million new U.S. jobs in a two-year plan that Democratic lawmakers including Senator Charles Schumer of New York said may be as big as $700 billion. German Chancellor Angela Merkel and French President Nicolas Sarkozy said today in Paris they’re considering further steps for a European Union stimulus package.

The biggest measure announced yesterday by Chancellor of the Exchequer Alistair Darling, 54, was a 12.5 billion-pound cut in the value-added tax, to spur consumers. The sales duty will fall to 15 percent from 17.5 percent for 13 months. Brown will also offer help to workers on low incomes by making a previous tax cut permanent and increased aid to pensioners and people with children.

Brown’s stimulus, which lawmakers will consider in the first half of 2009, is the largest since 1988, when Thatcher’s finance minister, Nigel Lawson, provided a boost equivalent to 1.2 percent of gross domestic product. The so-called “Lawson Boom” that followed ended in a housing bust in the early 1990s.

Yesterday’s package, equal to 1.1 percent of the economy’s value, will add to a budget deficit that the Treasury expects to spiral as the slump in property prices and financial markets reduces tax revenue and spending on jobless benefits climbs.

Budget Deficit

At an estimated 8 percent of gross domestic product in the next fiscal year, the deficit will exceed the 7.7 percent reached in the aftermath of the early 1990s recession and a figure of 7 percent in the mid-1970s after the 1973 Middle East oil crisis led to two years of economic contraction.

To help pay for the plan, Brown will cut the pace of spending growth and raise the income tax rate on people making more than 150,000 pounds from the current top rate of 40 percent in the fiscal year starting in April 2011. That’s been the highest rate since 1988.

Under the new system, a person earning 200,000 pounds a year will pay 5,795 pounds more in taxes; at 150,000 pounds, the bill would rise by 3,040 pounds, while a person earning 100,000 pounds will pay 375 pounds more a year.

‘Big Headlines’

“It’s clearly something which they’re hoping to get big headlines on, and it will play well with the more traditional elements of the Labour Party,” said Peter Dixon, an economist at Commerzbank AG in London. “It’s the sort of thing which to a redistributive chancellor sounds good: that we’re going to soak the rich and those bankers that got us in this mess now.”

While Darling says his stimulus plan will limit the severity of the recession, some economists say his forecasts for the economy are too optimistic, meaning the public finances may deteriorate more rapidly.

Darling reiterated in interviews today that the economy will shrink no more than 1.25 percent next year and as little as 0.75 percent, and expand as much as 2 percent in 2010. The International Monetary Fund and the Bank of England forecast a 1.3 percent contraction in 2009, the most since the last recession in 1991.

The slump will sap tax receipts and drive debt to a record high. Net debt will climb to 1.1 trillion pounds, or 57 percent of GDP, in the fiscal year through March 2014 from 526 billion pounds in the fiscal year that ended in March.

That gave the Conservatives a target for their criticism.

“In the end, all Labour Chancellors run out of money,” said George Osborne, 37, the Conservative spokesman on economic policy.

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net.

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London Session Recap

Daily Forex Fundamentals | Written by Forex.com | Nov 25 08 13:59 GMT |

The risk trade was pared in London trading on the back of the fallout of the $66 billion hostile takeover of Rio Tinto by BHP Billiton. This sent a small shockwave through equity marts as it reaffirmed the reality that the global economy is slowing down in a big way. European stocks drifted back to flat on the day (recently recovered though) and the risk trades in FX were lower on the follow. EUR/USD was down a modest -20 pips and was sitting near the 1.2850 area ahead of the NY open. JPY crosses were expectedly weaker. USD/JPY slipped -45 pips towards 96.00/10 while EUR/JPY shed a more aggressive -75 points into the 123.50 area. This reversed promptly at the NY open as fresh news out of the Fed sparked a new rally in risk. The news that the Federal Reserve will directly support consumer and small business lending led US stock futures markedly higher in the NY open. The S&P 500 went from negative small to up more than 24 points. This has Euro trading near the critical 1.3000 resistance zone though USD/JPY has failed to make a significant move towards the pivotal 97.50 area. We would expect higher US stocks on the day to see fresh intraday highs in the FX risk trades, though the risk of a reversal into the lows looms as well. Stay focused on the price action in equities. Upcoming Economic Data Releases (NY Session) Prior Estimate 11/25/2008 14:00 GMT US S&P/CS Composite-20 YoY SEP -16.60% -16.90% 11/25/2008 14:00 GMT US S&P/Case-Shiller US HPI YOY% 3Q -15.40% -17.10% 11/25/2008 15:00 GMT US Consumer Confidence NOV 38 38.5 11/25/2008 15:00 GMT US Richmond Fed Manufact. Index NOV -26 -26 11/25/2008 15:00 GMT US House Price Index MoM SEP -0.60% -0.70% 11/25/2008 22:00 GMT US ABC Consumer Confidence 23-Nov -52 - - Forex.com http://www.forex.com DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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China Has Room to Keep Loosening Monetary Policy, OECD Says

By Nipa Piboontanasawat

Nov. 25 (Bloomberg) -- China has room to keep loosening monetary policy to support growth as the global economy weakens, the Organization for Economic Co-operation and Development said.

“With headline inflation declining, monetary policy has scope to further offset the impact of the global downturn,” the OECD said in a semiannual report today.

The OECD joined the World Bank in cutting forecasts for China’s economic growth next year, predicting an 8 percent expansion, down from a 9.5 percent estimate in June. The central bank has already cut interest rates three times from mid-September to counter a deepening slowdown in the world’s fourth-biggest economy.

The key one-year lending rate stands at 6.66 percent.

China this month announced a $586 billion stimulus package through 2010, including infrastructure projects and tax cuts for business investment.

The plan “represents a major upside factor for the development of the economy over the next two years,” the OECD said. It suggested adding income-tax cuts, a move Chinese lawmakers have already agreed to support, according to a report in the official China Daily newspaper.

Weakening inflation also provides an opportunity for energy-price reforms, including “major” increases in electricity prices, the OECD said.

China’s economy expanded 9 percent in the third quarter from a year earlier as exports cooled. This quarter, economic growth may slow to 4 percent, the weakest pace since at least 1994, according to JPMorgan Chase & Co.

Slowing Inflation

The OECD reduced its forecast for this year’s expansion to 9.5 percent from the previous 10 percent estimate.

Inflation may slow to 3 percent in 2009 and 2.5 percent in 2010, from 6.1 percent this year, it said. Consumer prices climbed 4 percent in October, cooling for a sixth month.

A rebalancing of the nation’s growth towards domestic demand “entails stresses in some sectors of the economy, particularly the export-oriented ones,” the report said.

Exports “have been losing momentum since mid-2007, which has resulted in a marked fall in the growth of imports used in export-processing industries,” the OECD said.

Domestic demand will stay “soft” in the first half of 2009, partly because of weak real-estate investment, before gradually recovering into 2010, the report said.

As demand increases, import growth will climb, leading to a decline in the current-account surplus as a share of gross domestic product, it said. The proportion is likely to drop to 9.4 percent in 2009 from 9.7 percent this year, falling to 9.1 percent in 2010.

The OECD forecasts for China’s economic growth are higher than World Bank estimates, also released today, of 7.5 percent in 2009 and 9.4 percent this year.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net

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King Says British Banks May Still Need More Capital

By John Fraher and Jennifer Ryan

Nov. 25 (Bloomberg) -- Bank of England Governor Mervyn King said U.K. financial institutions may still need more capital and the ``single most pressing challenge'' facing policy makers is to revive the flow of credit through the economy.

``We may not have come to the end of recapitalization,'' King said in testimony to lawmakers in London. ``We should not shy away from that if that proves to be necessary.''

The Bank of England and Prime Minister Gordon Brown's government are trying to revive lending and shore up economic growth with interest-rate cuts, the biggest budget giveaway since the late 1980s and a multi-billion pound bailout for the financial system. Britain is headed for its worst recession in 17 years and a Treasury report published yesterday forecasts new mortgage lending will dry up next year.

Royal Bank of Scotland Group Plc, Lloyds TSB Group Plc and HBOS Plc have taken 37 billion pounds ($56 billion) of government funds as part of a plan to stabilize the banking industry.

Bank of England Deputy Governor Charles Bean, who flanked King at the testimony, said the dysfunctional credit market means central bank rate decisions may need to be more dramatic than in ``more normal'' times.

Rate Policy

``The `bank credit'' channel in particular is impaired by the balance sheet contraction taking place in financial institutions,'' said Bean. ``In such circumstances, bank rate may need to be moved more aggressively to achieve the same impact in more normal circumstances.''

The pound fell 0.5 percent to $1.5067 after the testimony started. Against the euro, it declined 0.3 percent to 85.21 pence. The Bank of England this month cut its main rate by 1.5 percentage points to 3 percent, the lowest since 1955.

King said failing to get banks lending again could raise the risk of deflation, and stoking credit growth is ``more important than anything else at present.'' When asked whether the government should go so far as to nationalize individual banks, King replied that ``it would be a very serious error to rule out measures that may prove necessary.''

King also said the Bank of England would have to cooperate closely with the Treasury if it were forced to cut its benchmark interest rate to zero.

``At that point there needs to be a close coordination between government and central bank because monetary policy is very close to debt management,'' said King. ``But decision-making power as to what the bank would do would still rest with the Monetary Policy Committee.''

King said the financial system needs to be better controlled to prevent a repeat of the credit crisis, which was sparked last year by a collapse in the U.S. housing market.

``There is a genuine policy objective in not letting the banking sector become too big,'' said King. ``We need new policy instruments which can be used to try to stabilize the growth rate of the financial sector'' because of the ``potential damage'' it can cause for the rest of the economy.

To contact the reporters on this story: John Fraher in London at jfraher@bloomberg.net; Jennifer Ryan in London at Jryan13@bloomberg.net.

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U.S. Economy Shrank 0.5% in 3rd Qtr, Most Since ’01

By Shobhana Chandra

Nov. 25 (Bloomberg) -- The U.S. economy shrank in the third quarter faster than previously estimated as consumer spending plunged by the most in almost three decades.

Gross domestic product contracted at a 0.5 percent annual pace from July through September, the most since the 2001 recession, according to revised figures from the Commerce Department today in Washington. The government’s advance estimate issued last month showed a 0.3 percent decline.

The world’s largest economy has sunk into an even deeper recession this quarter as the credit crunch, the worsening housing market, and mounting job losses cause consumers and businesses to retrench. President-elect Barack Obama yesterday warned that the U.S. may lose “millions of jobs” should the federal government not quickly enact an economic-stimulus package.

“We’ve got a big downdraft coming on,” John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. “The recession is certainly looking longer and deeper. It’s just getting very tough for consumers.”

U.S. stock-index futures rallied after the Federal Reserve committed up to $800 billion in new funding to unfreeze credit for homebuyers, consumers and small businesses.

Today’s GDP report is the second of three estimates. The figures matched the median estimate of 71 economists surveyed by Bloomberg News. Forecasts ranged from declines of 0.1 percent to 0.9 percent.

The economy grew at a 2.8 percent pace in the previous three months.

Less Spending

Corporate profits, including estimates for the value of inventories and adjustments for capital investments, dropped 0.9 percent from the previous three months, hurt by $46.2 billion in insurance payments and losses caused by Hurricane Ike. It was the seventh decline in the last eight quarters.

Consumer spending, which accounts for more than two-thirds of the economy, dropped at a revised 3.7 percent annual rate, more than the 3.1 percent decrease estimated by the government last month. It was the first decline since 1991 and the biggest since 1980, after President Jimmy Carter imposed credit controls.

Americans may pull back further after employers fired 240,000 workers in October and the unemployment rate jumped to the highest level since 1994.

Wage figures showed a smaller gain than previously estimated in the second quarter, reflecting the weakening job market. Salaries grew $13.3 billion in the second quarter, $37.3 billion less than Commerce’s earlier forecast.

More Firings

Today’s revisions may cause some economists to lower their GDP forecast for the last three months of 2008. Companies cut inventories at a slower pace than previously estimated, indicating more production cuts may be on the way as spending weakens.

Xerox Corp., the world’s largest maker of high-speed color printers, is eliminating 3,000 jobs and trimming manufacturing costs to save $200 million next year. Chief Executive Officer Anne Mulcahy yesterday said at a conference that Xerox isn’t projecting “any quick economic turnaround” in 2009.

Residential construction fell at a 17.6 percent pace, less than the prior estimate. Home starts and permits for future construction both dropped to record lows in October, according to Commerce figures, indicating the housing recession will extend into a fourth year. Home resales also fell in October and prices plunged by the most on record, a private report showed yesterday.

Trade Gap

A narrowing trade gap helped prevent an even deeper slump last quarter. Still, the economy may not be able to depend on continued assistance in coming months. American exports will decline as the International Monetary Fund predicts downturns next year in the U.S., Japan and the euro region, the first simultaneous recession since the end of World War II.

The National Bureau of Economic Research, the Cambridge, Massachusetts-based official arbiter of U.S. economic cycles, has yet to call a recession.

The group bases its assessment on indicators including GDP, employment, sales, incomes and industrial production, and usually takes six to 18 months to make a determination. According to the NBER, the last recession lasted from March to November 2001.

Jeffrey Frankel, a member of the NBER panel, in a Nov. 10 Bloomberg Television interview said the U.S. is entering “the steep part” of what could be the worst recession since World War II. Martin Feldstein and Robert Hall, fellow members of the committee, have said the economy is in a recession.

President-elect Obama, who named key members of his economic team yesterday, vowed to push for a large economic- stimulus package, though he declined to say how big it would be.

To contact the report on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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Fed Commits $800 Billion More to Unfreeze Lending

By Scott Lanman

Nov. 25 (Bloomberg) -- The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.

The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.

With today’s announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S. Bernanke outlined as a Fed governor six years ago. Policy makers are aiming to prevent a financial collapse and stamp out the threat of deflation.

“They’re trying to put funds into the system, trying to unfreeze these markets,” said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”

The Fed will purchase up to $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae, the statement said.

Aid for Housing

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed said.

Separately, under the new Term Asset-Backed Securities Loan Facility, the Fed will lend up to $200 billion on a non-recourse basis to holders of AAA rated asset-backed securities backed by “newly and recently originated” loans, such as for education, automobiles, credit cards and loans guaranteed by the Small Business Administration, the Fed said.

The Treasury will provide $20 billion of “credit protection” to the Fed in the lending program, using funds from the $700 billion financial-rescue package. The Treasury said in a statement that the facility may expand over time and cover other assets, such as commercial and private residential mortgage- backed debt.

On the ABS facility, the Fed is trying to avoid having “continued disruption of these markets” that would limit lending and “thereby contribute to further weakening of U.S. economic activity,” the central bank said.

ABS Program

Under the new lending program, known as the TALF, the New York Fed will auction a fixed amount of loans each month for a one-year term. Assets will be held in a special-purpose vehicle to be created by the Fed. The program will stop making new loans on Dec. 31, 2009, unless the Fed Board of Governors extends it.

Lenders providing credit under the TALF “must have agreed to comply with, or already be subject to,” executive- compensation restrictions in the October bailout law, the statement said.

The Fed will start buying the direct debt of government- sponsored enterprises -- Fannie, Freddie and a dozen federal home loan banks -- through primary dealers in government debt from next week. The purchases of mortgage-backed securities will be done through asset managers, and officials aim to begin the effort by year-end.

Purchases of both types of debt “are expected to take place over several quarters,” the Fed said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

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Nowotny Says ECB Should Keep ‘Firepower,’ Be Cautious

By Simone Meier and Andreas Scholz

Nov. 25 (Bloomberg) -- European Central Bank council member Ewald Nowotny said he favors the bank retaining some “firepower” as it tackles the recession, suggesting he sees no need for more aggressive interest-rate cuts yet.

“Nobody really knows how this very difficult economic situation that we have now will develop,” Nowotny, who heads Austria’s central bank, said in an interview with Bloomberg Television in Vienna yesterday. “It makes sense to be rather cautious and keep some of the firepower, and that means of course that you cannot use it up all in one go.”

ECB Executive Board member Lorenzo Bini Smaghi joined Nowotny today in urging a measured response to Europe’s deepening economic slump, saying “sharp” rate cuts may exacerbate negative sentiment. Both spoke after reports showed German business confidence plunged to a 16-year low and Europe’s manufacturing and service industries contracted at the fastest pace on record.

“If they cut rates very aggressively, it could give a sense of alarm,” said Gilles Moec, an economist at Bank of America Corp. in London. “They’re trying to rein in market expectations.”

Investors are betting the ECB will lower its benchmark rate by at least 75 basis points at its next meeting on Dec. 4, stepping up its policy response to the worsening economic outlook after two 50-point cuts to 3.25 percent in the past two months.

Worse Than Expected

“We will see whether we go more or less the way we did in the last months or whether there will be some change in the mood, but this all depends on the discussion we’re going to have in December,” Nowotny said. Still, “the way the ECB has acted so far, I believe that we’ll continue in this manner,” he said.

The economy slipped into its first recession in 15 years in the third quarter after the global financial crisis pushed up lending costs and eroded demand for European exports.

The Organization for Economic Cooperation and Development said today it expects the euro-region economy to shrink 0.6 percent next year after growing 1 percent in 2008. The Paris-based OECD called on the ECB to cut its key rate to 2 percent.

“We see a very rapid and stronger negative economic development than expected,” Nowotny said. “It’s safe to expect that given the very difficult economic situation, one has to respond to this with some rate cuts.”

‘More Cautious’

Eonia forward contracts show investors have fully priced in a drop in the ECB’s key rate to 2 percent in January. Nowotny declined to rule out a move to 2 percent, saying that the bank “will see how things develop” in coming months.

The U.S. Federal Reserve has reduced its key rate by 3.25 percentage points to 1 percent so far this year and the Bank of England lowered its benchmark by 1.5 percentage points last month alone, taking it to 3 percent. The Swiss central bank on Nov. 20 cut its key rate by 1 percentage point to 1 percent in an unscheduled move.

“The ECB is certainly a little bit more cautious and doesn’t want to use all its ammunition at once,” Nowotny said. “The ECB’s policy so far has proven right.”

Still, the bank has room to focus on reviving the economy as retreating oil and food prices push down inflation.

Nowotny, 64, a former economics professor who took the helm of Austria’s central bank on Sept. 1, said he expects inflation to average just below 2 percent next year. That would see the ECB achieve its definition of price stability for the first time in 10 years.

‘Deep, Deep Slowdown’

“As we’ve had such a deep, deep slowdown of the economy, I expect that inflationary expectations will be rather stable for quite some time,” Nowotny said. “So, that doesn’t mean that interest rates will automatically go up.”

While central banks shouldn’t keep borrowing costs low “for too long” and need to “remove the punch glass when the party is at its best,” Nowotny noted that “the party isn’t yet doing especially well.”

The credit crisis worsened after the collapse of Lehman Brothers Holdings Inc. in September, sparking the biggest global stock sell-off in 70 years. The world’s biggest financial companies have posted almost $1 trillion in writedowns since the start of last year, when the collapse of the U.S. subprime mortgage market triggered a credit shortage.

The ECB, along with the world’s largest central banks, has injected billions into money markets to help restore lending among commercial banks, while governments across Europe have launched stimulus packages to bolster their economies.

Nowotny said the economy may start to recover in the second half of 2009.

“I would think that there is a chance that this slowdown could end by the middle of next year, because a number of countermeasures have been taken with regard to the banking sector, with regard to the real economy,” he said. “All this needs some time to work through.”

To contact the reporters on this story: Simone Meier in Frankfurt at smeier@bloomberg.net; Andreas Scholz in Frankfurt at agscholz@bloomberg.net.

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French Business Confidence Declines, Italian Pessimism Grows

By Ben Sills and Lorenzo Totaro

Nov. 25 (Bloomberg) -- French business confidence fell to the lowest in more than 15 years and Italian consumers grew more pessimistic as the euro-region economy slipped into a recession, threatening to choke exports and employment.

An index of sentiment among 4,000 French manufacturers declined to 80 in November, the lowest since October 1993, according to Insee, the Paris-based national statistics office. Italian consumer confidence fell to near July’s 15-year low of 95.8.

“French business confidence has truly fallen off a cliff,” said Marco Annunziata, chief economist at UniCredit MIB in London. “The data underscore the urgency of further monetary and fiscal stimulus to limit the depth and length of this recession.”

The European Central Bank is cutting interest rates and European Union officials are crafting a region-wide stimulus plan to try to limit the fallout from the global credit crisis. Reports in the past week have showed the economy is worsening, with German business confidence dipping to a 16-year low and the Organization for Economic Cooperation and Development forecasting the euro-region will contract next year.

The deepest U.S. housing slump since the Great Depression has pushed up the cost of credit globally and squeezed economic growth. Banks have clamped down on lending, leaving companies and consumers struggling to gain credit and the resulting plunge in stock markets has eroded savings and further drained confidence. The benchmark stock indexes in France and Italy have each declined more than 40 percent this year.

Economic Contraction

Gross domestic product in the 15 euro nations shrank for the second straight quarter in the three months through September and manufacturers have responded by cutting production and firing workers.

“We’re really at the heart of the slowdown,” said Laurence Boone, an economist at Barclays Capital in Paris. “There’s a realization that it takes time to restore confidence and there’s bad news both on the real economy and on the financial front.”

PSA Peugeot Citroen, Europe’s second-biggest carmaker, said Nov. 20 that it plans to cut 3,550 jobs through voluntary departures. Renault SA announced plans in July to cut 6,000 European jobs, including 1,000 at a plant in Sandouville, France, where it assembles the Laguna mid-sized car.

Job Cuts

Italy’s Pirelli & C. SpA, Europe’s third-largest tiremaker, plans to eliminate about 200 administrative jobs in Milan and will likely continue idling plants. Fiat SpA, Italy’s largest manufacturer, plans to increase temporary layoffs in the fourth quarter, idling 27 percent of the workforce.

BASF SE in Germany, the world’s largest chemicals maker, and carmakers Bayerischer Motorenwerke AG and Daimler AG are scaling back output as orders dwindle.

The OECD today forecast that unemployment in its member countries will increase by 8 million in the next two years to 42 million and economic growth in OECD will contract 0.4 percent next year.

To combat rising joblessness and prod the economy, European Union officials are crafting a stimulus package that will be based on contributions from each of the EU’s 27 national governments. German officials have estimated the package at 130 billion euros ($168 billion), a figure European Commission President Jose Barroso has refused to confirm.

Oil Prices

Manufacturers and consumers may get some relief as slowing growth depresses oil prices and helps curtail inflation. The price of oil has dropped to $53 a barrel from a July peak of $147, boosting households’ disposable income.

The decline led Spanish producer prices to plunge 1.2 percent in October, the biggest monthly decline in more than 20 years, a separate report showed today. German consumers were unexpectedly more upbeat in November as confidence rose for a third month on the decline in fuel costs, another report said today.

The slump in economic growth is fueling expectations the ECB will lower borrowing costs for a third time since Oct. 10. Investors are betting the bank will cut its benchmark rate of 3.25 percent by at least 75 basis points at its next policy meeting on Dec. 4, Eonia forward contracts show. That would be the sharpest rate reduction in the bank’s 10-year history.

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net

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