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Markets foresee global contraction

France, Ireland, and Denmark are in recession. Others teeter on the edge.

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European governments' approach to financial problems has so far been on a case-by-case basis. That is similar to the way the US government attacked the problem in its opening stages.

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But as the credit crisis worsened, the United States moved on to a more systemic rescue plan, via the Treasury's new $700 billion asset-purchase ability. European economies are more intertwined than are their political structures, and so far the eurozone has not been able to follow suit.

The Sentix gauge of investor sentiment in the 15-nation eurozone fell in October to its lowest reading since its inception in 2002. Investors in the zone "expect a recession," concluded the survey.

In Britain, economic growth slowed to a virtual standstill in the second quarter. Indices for new manufacturing orders, employment, and output sank to their lowest marks since the early 1990s.

A European Commission report now projects that Britain, Spain, and Germany will all fall into recession by year's end.

As to how sharp this downturn might be, a quick recovery appears unlikely, according to the International Monetary Fund.

The financial crisis will act as a dampening agent, making any coming recessions perhaps two to three times worse than they might otherwise have been, according to the IMF's newly released World Economic Output.

"It is now all too clear that we are seeing a dangerous shock to mature financial markets, posing a major threat to global growth.... Even though past periods of financial stress have not necessarily been followed by recessions, we find that when the banking system suffers major damage, as in the current episode, the likelihood of a severe and protracted downturn in activity increases," said Charles Collyns, deputy director of the IMF Research Department, at an Oct. 2 press conference.

Emerging market economies such as India and China have so far been insulated from the credit crunch, due to the fact that their financial institutions had much less money invested in bad US mortgage-based assets.

Their economies may be somewhat insulated from a spreading downturn as well, though declining demand from major markets such as the US will have an effect.

The overall emerging-market growth rate will slump to 5.7 percent in 2009, down from 7.4 percent in 2007 and a projected 6.3 percent for 2008, according to a forecast from Michael Mussa, senior fellow at the Peterson Institute for International Economics.

The next step in attempting to control the spreading downturn might be for European leaders to take a more coordinated approach to their problems.

The European response so far has not nearly been enough, says Karel Lannoo, CEO of the Centre for European Policy Studies in Brussels.

European politicians and bankers have "been thinking that this was just limited to the US," he says.

Fear of a lasting economic event so dire that it will endanger people's savings is spreading, according to Mr. Lannoo, and the challenge is to keep this fear from expanding.

"We cannot start to let customers start to think that their money is at risk.... Europe needs to have a whole plan that is a quantum step forward [from what has already been proposed] to change the minds of customers," he says.

Jeffrey White in Berlin contributed to this report. Material from Associated Press was also used.