ECB cuts rates as global recession looks more likely

The ECB cut interest rates on Thursday pretty much as economists expected. Bloomberg reports:

The European Central Bank cut its benchmark interest rate by half a percentage point to 2 percent, matching a record low, as the deepening recession pressed policy makers into action.

Inflation has peaked and is expected to continue falling this year.

The rate declined to 1.6 percent in December.

The ECB last month forecast inflation would average 1.4 percent this year and 1.8 percent in 2010. It predicted the economy would contract 0.5 percent in 2009 before rebounding to expand 1 percent in 2010.

This means there will probably be more rate cuts.

Investors expect the ECB to lower the benchmark rate to as low as 1.25 percent by June, Eonia forward contracts showed before today’s decision.

Elsewhere, there is plenty of evidence that the global economy is in a slump.

Bloomberg reports Thursday's US economic reports.

Initial jobless claims jumped to 524,000 in the week ended Jan. 10, the Labor Department said today in Washington. Producer prices fell 1.9 percent, capping the first annual drop since 2001. Separately, the Federal Reserve said manufacturing in the Philadelphia and New York regions shrank further in January.

Earlier, the reports from Japan showed a similar pattern. From Bloomberg:

Japanese machinery orders fell by a record 16.2 percent in November, twice as much as economists estimated, as businesses cut spending amid a deepening global recession...

Weak domestic demand and falling oil prices may herald a return to the deflation that plagued Japan for almost a decade until 2005. Producer prices rose 1.1 percent in December, the slowest pace since May 2004, a central bank report today showed. Wages tumbled 1.9 percent in November and consumers have pared spending for nine consecutive months.

And the impact of the global economic downturn is hitting China as well. Again from Bloomberg:

Foreign direct investment in China declined for a third month, adding to the toll that recessions in the U.S. and Europe are taking on the world’s third-biggest economy.

Investment fell 5.7 percent to $5.98 billion in December from a year earlier, the commerce ministry said at a briefing in Beijing today. November’s decline was 36.5 percent...

China’s economy overtook Germany’s in 2007 to become the world’s third largest, according to revised figures released yesterday by China’s statistics bureau...

So a global recession is increasingly likely. At least that's what the UN seems to think. From Reuters:

Countries around the world must boost demand with massive coordinated packages to tackle an economic outlook of unrelieved gloom, the United Nations said on Thursday.

Launching its 2009 World Economic Situation and Prospects, the U.N. said the global economy was deteriorating so fast that the report's baseline assumptions were already out of date, and the pessimistic scenario was now more realistic...

The U.N. report forecasts 1.0 percent global economic growth this year, with small recessions in developed nations offset by strong growth in developing countries including China and India.

But a pessimistic scenario projects steeper contractions in rich countries and smaller growth in emerging and developing nations, giving an overall 0.4 percent decline in world output.

[Heiner Flassbeck, director of globalisation and development strategies at UNCTAD] said this scenario was now more likely. "For the world as a whole the outcome could be zero or even slightly below zero. This is not an overly pessimistic view," he said.