Global sharemarkets dive, World Bank slashes economic forecasts: Economy roundup

Just when you thought things were looking good, the sharemarket reminds you not to get ahead of yourself. The Australian share market has opened 2.6% lower today after Wall Street lost over 3% overnight, the worst one-day loss in two months.

The benchmark S&P/ASX200 index was down 111.1 points or 2.84% to 3807.1 at 12.05pm AEST.

The Australian dollar has also fallen to just US78c as investors around the world flocked to the safety of the US dollar.

Banks have been amongst the hardest hit. Commonwealth Bank shares lost 2.8% to $37.60, with ANZ also losing 3.1% to $16.06. Westpac lost 3.9% to $19.34 as NAB fell 2.4% to $21.94.

In the US, Wall Street suffered its worst day in two months due to reports from analysts saying the economy may not be as healthy as previously thought.

“The recovery is likely to be anemic by post-war standards,” Hugh Johnson, chief investment officer of Johnson Illington Advisors told Reuters.

“The recovery in the economy and earnings is unlikely to be as strong as the rise in stock prices, since early March, has implied.”

The World Bank also released a report stating that the prospects of recovery are “unusually uncertain”.

It has revised its forecast that the global economy would contract by 1.7% in 2009 and is now expecting a 2.9% contraction.

It also expects the US and Japan, the world’s two largest economies, to contract by 3% and 6.8%, respectively in 2009, compared to its March forecasts of just 2.4% and 5.3%.

Chief economist Justin Lin said in an interview with Reuters that he was concerned about rising borrowing costs, due to debt offerings and weak financing conditions. He also said that governments should continue to do as much as they can to stimulate economics.

“If on the financial side you have a recovery and on the real side you also show improvement, then we will be confident that we are going to have a sustained recovery,” Lin said.

“It is very important to let the stimulus continue until the capacity utilisation returns to a normal level. Otherwise, there is always a danger that unemployment will rise and growth [will] slow down.”

The Dow Jones industrial average dropped 200.72 points, or 2.35%, to 8339.01. The S&P 500 Index was down 28.19 points, or 3.06%, to 893.04. The results were the worst since 20 April, when Bank of America released results that fuelled concerns about the financial system.

Also in the US, President Barack Obama has announced a deal with US drug companies to reduce costs for prescriptions for the elderly, which could be an early step for passing his health-care reform package through Congress.

“This is a significant breakthrough on the road to healthcare reform, one that will make the difference in the lives of many older Americans,” Obama said at the White House.

The deal offers $US80 billion in discounts over 10 years.

Back home, Telstra chief executive David Thodey has told nearly 300 of the company’s executives that it will not award pay rises this year due to the company cutting back on expenses.

Thodey himself has taken a pay cut of $1 million, while thousands of Telstra staff will receive 2% pay rises based on performance.

Fund manager Perpetual has said its outlook for cash and fixed income is good, and that the market has “passed the point of maximum risk,” the company said in an update to the ASX.

Meanwhile, American airline Delta has said Swine Flu may cost the company $US250 million in revenue, while it plans to offset the loss through cutting capacities.

“The steps we are taking have essentially involved capacity because the flu has decreased demand,” Delta chief executive Richard Anderson said at the company’s AGM.