Fear of Global Depression Rises as US Reveals True Extent of Decline

Drastic revisions to official GDP figures that were far larger than expected showed the world's biggest economy was shrinking at an annual rate of 6.2 per cent in the final quarter of last year.

The pace of contraction, the worst since early 1982, was much worse than the 3.8 per cent rate initially estimated and the news jolted markets worldwide, rekindling anxieties over the threat of a global depression.

On Wall Street, the S&P 500 index of US blue-chip shares fell by more than 1 per cent by early afternoon, while the Dow Jones industrial average sank by about 0.5 per cent. The overhaul of the US figures means that America suffered an even sharper decline in the fourth quarter than Britain, which many economists have warned was set to bear much of the brunt of the global downturn.

On an equivalent basis, US GDP plummeted by 1.6 per cent in the quarter, compared with a plunge of 1.5 per cent suffered by the UK, and a matching 1.5 per cent drop initially reported for the 16-nation eurozone.

The news came as Gordon Brown prepares to fly to Washington for White House talks on Monday with President Obama on the state of the global economy.

Mr Brown will be the first leader of a big European economy to meet the President since his inauguration last month. The focus of their meeting will be progress in the increasingly frenetic efforts by Western leaders to combat world recession.

Mr Brown will discuss with Mr Obama preparations for the summit of leaders of the G20 group of key global economies to be held in London in April.

Ahead of the summit and a gathering of G20 finance ministers next month, economists in the City and on Wall Street said that yesterday's dire US figures set the stage for equally terrible news over the key economy's performance since the start of the new year. Rob Carnell, of ING Financial Markets, forecast that the first quarter would see America suffer “another horror story”.

The severity of the US recession was emphasised by the details of yesterday's GDP data, which inflamed worries over a still deeper and more protracted downturn.

American consumer spending, which accounts for more than two thirds of US domestic economic activity, was confirmed as having tumbled at a headlong annual pace of 4.3percent in Q4, equal to a quarter-on-quarter drop of 1 per cent, marking its sharpest drop since the second quarter of 1980.

The nosedive in consumer spending came despite sharply lower petrol prices giving a boost to the spending power of Americans.

The vulnerability of US consumers was highlighted by a renewed fall in their confidence, according to the latest snapshot from the University of Michigan. The poll's main index of sentiment for this month fell to a three-month low of 56.3, dropping from 61.2 in January as the mounting wave of job losses took its toll.

The frailty of US conditions was evident virtually across the board. Exports, which until recently had been boosted by the relative weakness of the dollar and provided one of the few pillars of support for the distressed economy, suffered their sharpest fall since 1971. Sales of US goods and services in overseas markets fell at a revised annual rate of 23.6 per cent, down from an initially estimated 19.7 per cent.

Investment spending by business plummeted at a 21.1 per cent rate, the worst fall since 1975, and knocked 2.5 percentage points off GDP.

Another blow came from a 22.2 per cent annual drop in Q4 in investment spending on construction of new commercial property.

There was only scant comfort for Wall Street as the figures showed that US companies cut back stocks on their shelves far more sharply than previously estimated in the fourth quarter, a development that meant further cuts in such inventories might deal less of a blow to the economy in subsequent quarters.

Economists are predicting a further annual equivalent drop of as much as 5 per cent is US GDP in the present quarter, which would inflict the sharpest back-to-back decline in output over consecutive quarters since 1958.