Fed chief warns of lengthy slowdown

October 20, 2008
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, WASHINGTON, October 20 – The chairman of the US Federal Reserve warned the country faced facing a protracted slowdown Monday, amid forecasts the financial crisis could push worldwide unemployment to a record high by the end of 2009.

The warning from Ben Bernanke, delivered just hours after China posted figures showing a slowdown in growth, knocked the shine off a slight gain in the markets which appeared to be bottoming out after recent falls.

Amid more dire news in the banking industry, Sweden became the latest government to shore up its financial sector, presenting a plan worth 1.5 trillion kronor (152.2 billion euros, 206.1 billion dollars).

In a candid appearance beofore a congressional committee, Bernanke said consumption was falling, confidence was low and the housing market depressed.

"The slowing in spending and activity spans most major sectors," he said.

"With the economy likely to be weak for several quarters and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," he added.

While the financial crisis has failed to halt China\’s economic juggernaut, signs that even it is not insulated from the global downturn came with the anouncement that its growth had slowed to 9.0 percent in the third quarter.

It was the first time since 2005 that quarterly growth slipped into single digits and the lowest figure since the second quarter of 2003.

"The growth rate of the world economy has slowed down noticeably. There are more uncertain and volatile factors in the international economic climate," said Li Xiaochao, spokesman of the National Bureau of Statistics.

"All these factors have started to release their negative impact on China\’s economy."

Underlining the impact of the slowdown on jobs, the electrical appliance manufacturer Bailingda shut its factory in China\’s southern export hub of Shenzhen, leading to the loss of 1,500 jobs.

In Geneva, the head of the UN\’s International Labour Organisation (ILO) warned the financial crisis could lead to a 20 million rise in the number of unemployed worldwide by the end of 2009.

Estimates from the ILO indicate that the "number of unemployed could rise from 190 million in 2007 to 210 million in late 2009," said Juan Somavia, marking the "first time in history that we pass 210 million."

Despite the grim predictions from Europe, Asia and the US, the money markets rallied at the start of the week\’s trading after the big falls of recent weeks.

US stocks climbed sharply in early deals, as the Dow Jones Industrial Average leapt 2.40 percent, the Nasdaq composite gained 1.46 percent and the broad Standard & Poor\’s 500 index won 1.62 percent.

In late European trade, London was up by 2.01 percent, Paris advanced 1.40 but Frankfurt lost 0.50 percent as Volkswagen\’s share price slumped on profit-taking after soaring recently.

Investors were partly cheered by the weekend announcement that US President George W. Bush and European leaders have planned several summits to address the financial crisis but were also prowling for bargains after recent heavy falls.

Tokyo closed up 3.59 percent, Hong Kong surged 5.3 percent and Seoul gained 2.3 percent, a day after South Korea joined the list on Sunday of governments who have unveiled plans to safeguard its banks.

Governments around the world have been striving to safeguard the banking sector, underwriting inter-bank bank loans worth more than a trillion dollars, in a desperate bid to restore liquidity.

The Netherlands on Sunday announced a 13.4-billion-dollar bailout for ING, one of the world\’s largest banks, after it had forecast a loss of 500 million euros, or 675 million dollars at current rates, in the third quarter.

Swedish Finance Minister Anders Borg has repeatedly said the country\’s banks are not in need of state handouts but he nevertheless presented a plan Monday to allow financial institutes with liquidity problems to apply for loans.

The financial crisis erupted over the collapse of the market in high-risk subprime US home loans last year. The loans, repackaged as derivatives, had been resold to investors and banks around the world.

Widespread defaults set off a chain reaction through the financial system, eventually leaving banks short of cash and hesitant to make the interbank loans essential to the system\’s smooth functioning.

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