World sharemarkets were yesterday bathed in red as the deepening economic slump wiped away the gains of the past five days.
To cap off a bad day, the National Bureau of Economic Research declared that the United States entered recession late last year, ending 73 months of economic expansion.
Some relief could come today as the Dow Jones futures markets were both up last night, indicating a rally in sharemarkets.
Federal Reserve chairman Ben Bernanke said the US economy remained under considerable strain.
He urged decisive action to protect the US economy and said the Fed could directly buy securities and backstop markets as interest rates approached zero.
"Our nation's economic policy must vigorously address the substantial risks to financial stability and economic growth that we face," he said in a speech in Texas.
President-elect Barack Obama plans a powerful fiscal stimulus package to lift growth once he takes office on January 20, but he has provided scant details and says the plan is still being worked out.
Mr Bernanke said that further interest rate cuts beneath the Fed's present target of 1% for its benchmark overnight funds rate were "certainly feasible", but suggested the Fed would also use other unconventional measures to aid growth.
"Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver - the provision of liquidity - remains effective," he said.
In the past, Mr Bernanke has said the Fed could use so-called quantitative easing to boost growth once official interest rates had reached zero, as Japanese authorities were forced to do in the 1990s to end a decade of stagnation.
The New Zealand and Australian sharemarkets opened well down on Monday's close but strengthened towards their respective closings as most attention turned to the actions of the Reserve Bank of Australia yesterday and what the Reserve Bank of New Zealand would do tomorrow to its official cash rate.
The RBA cut 1% off its OCR, taking it to 4.25%.
Pressure is now on the New Zealand central bank to cut its OCR by 1.5% to 5%.
Asian markets followed the lead of the US markets and were down 3%-5% at 5pm.
Shares of the largest US banks tumbled yesterday as investors feared the dramatically slowing economy would undercut their businesses as the credit crisis continued.
The Standard & Poor's financial index shed a record 17% as Citigroup sank 22.2% and Bank of America slid 21%.
The Dow Jones industrial average fell 7.7% and the wider S&P 500 Index was down nearly 9%.
The technology rich Nasdaq was also down nearly 9% on the day.
In Asia, financial stocks also took a pounding.
Black Friday, the traditional start of the US holiday shopping season when retailers usually record their largest sales of the year, began with a whimper.
Investors fear retailers might turn in their bleakest sales in 20 years.
The New Zealand Institute of Economic Research took an optimistic view of the recession in this country, saying it would be relatively shallow and last until the first quarter of next year.
The New Zealand economy declined in the first half of 2008, according to official data.
NZIER said in its quarterly predictions that there was also negative growth in the second half of the year and the lowest point would be the March 2009 quarter.
It forecasts economic activity to contract 0.1% in the year to March 2009.
The recovery would be led by an upturn in private consumption from the first half of next year, and strengthening global economic growth from the second half of next year.
That rise in private consumption would be stimulated by lower petrol prices, lower interest rates, positive net immigration, wage inflation following the high inflation and tight labour market of this year, and the tax cuts of October and next April.
NZIER forecast "modest" growth for the four quarters of 2009, leading to 1.6% growth in the year to March 2010, before accelerating to 3.3% growth in the year to March 2011.
The recovery would be more gradual than previously forecast.
That was partly because of the lagged effect of prolonged high interest rates and tighter credit requirements in recent months that would dampen growth in investment more than previously anticipated.
Secondly, the weaker growth of this country's trading partners would dampen growth in net exports during the next 12 months more than was anticipated.
"People are already starting to see more money in their pockets in many households, but there's a lagged effect before consumers have the confidence to start increasing their spending again," NZIER senior economist Johannah Branson said.
The ANZ bank was sounding less optimistic yesterday, saying the coming 12 months would be the most challenging this economy had faced in more than two decades.
"We will not be going through a recession `lite' - not when we have a current account deficit of 8.4% of GDP, which is not showing any signs of improvement in the near term, judging from another dismal trade deficit of $942 million recorded in October."
