Japan output fall worse than expected

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By Ralph Boulton

LONDON (Reuters) - Asian economic powerhouses saw production tumbling on Friday, while in the United States Thanksgiving sales offered a key test of America's ability to spearhead recovery from global crisis.

Euro zone inflation plunged to an annual 2.1 percent in November from 3.2 percent in October and unemployment rose faster than anticipated, to 7.7 percent in October from an upwardly revised 7.6 percent in September. The data boosted expectations of a deep interest rate cut by the European Central Bank next week.

Chinese insurer Ping Ang provided a striking illustration of the global nature of the crisis when, according to a government source, it asked China's government to help seek compensation from Belgium over its losses in the European financial group Fortis after the group's nationalization.

The worst crisis in decades, which has humbled major world financial institutions, continued to encroach on the broader economy, driving output cutbacks, unemployment and bankruptcies.

A major European builder, Austria's Strabag, announced it would cut its investments by more than half next year.

German industrial conglomerate ThyssenKrupp posted better than expected 2007/8 pretax profit, but gave no forecast for the coming year. The company said it could not rule out production shutdowns, shorter working weeks and layoffs.

Japan, the world's number two economy, provided vivid evidence of the reach of the crisis, announcing a fall of 3.1 percent in industrial output for October, more than expected, with a drop more than twice as big predicted for November.

Household spending fell 3.8 percent from a year earlier, also more than expected.

WORSE THAN EXPECTED

The speed at which Japanese firms are slashing production and consumers are scaling back their spending, surprised economists and suggested the economy was in for a deeper and longer recession than earlier thought.

"Production is falling much faster than we had expected. Companies are adjusting their production very quickly," said Takumi Tsunoda, senior economist at Shinkin Central Bank Research. "The auto makers are the worst hit, but their turmoil is starting to spill over to other sectors, such as steel."

Many will be looking this weekend to the United States, where the crisis began with a collapse in the U.S. mortgage market that saddled banks throughout the world with bad debt.

"BLACK FRIDAY" SALES

America's "Black Friday" sales, the day after Thanksgiving holiday, provide a strong test of consumer confidence, a major driver of the U.S. economy. But the specter of unemployment could dampen spending despite price cuts in the runup to Christmas, a time that brings up to 40 percent of annual sales.

"Consumer spending on gifts for the holiday season is going to be down considerably," said Eric Anderson, professor of marketing at the Kellogg School of Management, Northwestern University in Illinois. "Black Friday will be the first indicator of how bad it's going to be. "

South Korea, Asia's fourth-biggest economy, followed Japan's pattern in reporting a sharp drop in factory output in October, leading some analysts to expect a full-blown recession rather than a slowdown projected by the authorities.

India, like China a major contributor to global economic growth in recent years, reported better than expected growth of 7.6 percent in the third quarter versus a year ago. But the economy lost momentum from the previous quarter's 7.9 percent.

Prospects now appear clouded by militant attacks in Mumbai, where operations by Indian commandos on Friday revealed dozens more bodies in a luxury hotel. The violence in India's financial hub, together with a state of emergency in Thailand, underscored political unrest as another threat to emerging markets.

FALLING OUTPUT

Reflecting the gloom affecting the motor industry from Detroit to Tokyo, a top executive at Honda Motor Co told Reuters Japan's no. 2 automaker faced a "Herculean task" meeting its already downgraded profit goals for this year.

The bleak Japanese output data followed China's warnings on Thursday that the world's fastest-growing major economy was in a sharp slowdown that threatened its stability, and a drop in euro zone business sentiment to a 15-year low that prompted calls for a big cut in the region's interest rates.

Canada joined the growing number of nations officially in recession, with Japan, Germany, Italy and the euro zone as a whole already on the list and the United States and Britain expected to get there soon.

Central banks have slashed interest rates to get credit flowing again and governments have pledged trillions of dollars in bank bailouts, extra spending and tax cuts to revive their economies and avoid massive job losses as companies cut costs.

On Friday, industry sources said the world's top two contract chip makers, Taiwan's TSMC and UMC were preparing to cut costs by up to 20 percent in anticipation of a sharp downturn in the sector.

China's hefty 108 basis point rate cut earlier this week, the U.S. Federal Reserve's $800 billion plan to rescue battered credit markets and hopes for a government bailout of U.S. carmakers, helped lift world stocks to two-week highs this week.

In Asia, markets extended gains, heading for a sixth straight rise in trade subdued by the lack of cues from Wall Street. Japan's Nikkei ended 1.7 percent higher, even as investors dumped shares of Panasonic, sending it tumbling 10.9 percent after it joined other electronics makers and cut its profit forecast. Shares in the rest of the Asia-Pacific region were up 1.8 percent.

European stock markets were a shade down by mid-morning.

The Japanese data challenged the view of some investors that markets had already fully discounted the economic downturn scenario and it was time to pick up some bargains. Japanese government bond futures rose after the bleak numbers.

Some economists saw Japan's economy shrinking for a full year, which would be the country's longest ever contraction.

Japan tackled its last decade-long spell of deflation with a policy of massively inflating banks' balances with zero-interest cash, but analysts are divided whether the central bank is ready to drive its rates, now at 0.3 percent, to zero again.

(Reporting by Reuters bureaux worldwide; Editing by Mark Trevelyan)

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