By Chris Giles in London and James Politi in Washington
Financial Times February 5 2008
The UK, Germany and Japan have rebuffed US calls for a global economic stimulus package even as new figures on Tuesday suggested the US might already be in recession.
The data, showing that the US service sector contracted for the first time in almost five years, provoked sharp falls in shares in Europe, while in the US the S&P500 fell 3.2 per cent – its worst one-day fall in almost a year.
At the close of trading, the Eurofirst 300 index of European equities was down 3.15 per cent to 1,313. The FTSE 100 index of UK shares closed 2.63 per cent lower at 5,868.
The figures came as it emerged that a weekend meeting of the Group of Seven leading economies would not agree on a concerted fiscal stimulus, nor on a regulatory package to address the turmoil in credit markets.
David McCormick, the US Treasury’s undersecretary for international affairs, said it was “especially important” that other countries, “take prudent steps to strengthen their economies’ demand components”.
His call received short-shrift from the finance ministries of Japan, Germany and the UK, which indicated they had no immediate intention of following the US fiscal stimulus package.
There was little consensus among G7 countries on what regulatory steps were needed to address the financial turmoil. Fukishiro Nukaga, Japan’s finance minister, said: “We have learned what such fiscal spending could mean from our experience after the burst of the bubble economy.”
However, signs of softening in big economies were not restricted to the US.
Activity in the US services industry, as measured by the Institute for Supply Management’s non-manufacturing business activity index, appeared to contract in January, adding to gloominess about the economic outlook.
“If the move does stand up on revision, then it suggests a significant and sudden broadening out of the weakness in the US economy,” wrote analysts at Goldman Sachs, reflecting uncertainty over the importance of the ISM index. “In its short history [since 1997] this survey has rarely produced readings below 50 outside recession.”
In the eurozone, the revised service sector purchasing managers’ index for January fell to 50.6 from 53.1 in December, indicating that at the end of last month sentiment deteriorated sharply and activity in the crucial service sector of the 15-member currency zone was barely growing.
Separate figures on Tuesday from the UK show that consumer confidence has fallen to its lowest level since the Nationwide Building Society started the series in 2004.
With the Bank of England expected to cut interest rates on Thursday, the weak eurozone figures suggested Jean Claude Trichet might also soften his language on the possibility of rate cuts.