By Herbert Lash and Ruth Pitchford
NEW YORK/LONDON (Reuters) - U.S. consumers retrenched more than expected in December, data showed on Wednesday, while slumping industrial and economic output, along with new banking woes, signalled more pain in Europe.
Sales at U.S. retailers last month fell a sharp 2.7 percent from November as a deteriorating economy made consumers slash spending during the key holiday period. Compared with a year earlier, sales plunged a record 9.8 percent in December.
The data again suggested the year-long U.S. recession was deepening and could be the longest since 1981. New data also showed that the slowdown, far from running its full course, is spreading rapidly in Europe and elsewhere.
"The economy is staring at a very steep, downward trajectory," said Jim Demasi, a strategist at Stifel Nicolaus & Co in Baltimore. "This shows a very sharp falling in household wealth and job creation. This shows a shock in consumer confidence."
In another sign of the grim economic outlook, U.S. business inventories fell a slightly more-than-expected 0.7 percent in November, the biggest decline in seven years.
The German economy, meanwhile, contracted sharply in last year's final quarter and euro zone industrial output plunged in November, boosting expectations the European Central Bank will make a deep cut to interest rates on Thursday.
German gross domestic product slowed to 1.3 percent, its weakest growth since 2005, with flagging foreign trade making a negative contribution to growth for the first time since 2003.
Not all the economic data, which economists have said will still get worse before it gets better, was gloomy. A report from about the battered U.S. housing industry, which economists say will be key to recovery, offered some rays of hope.
U.S. mortgage applications jumped in the first full week of 2009 as record low interest rates spurred the greatest demand for home refinancing loans in more than 5-1/2 years, the Mortgage Bankers Association said.
Low mortgage rates, however, have yet to fuel demand for loans to purchase homes.
The worst financial and economic crisis since the 1930s continued to squeeze global banks, even those previously credited with dodging much of the crisis, and force governments to contemplate further intervention.
Citigroup shares tumbled as concerns mounted about whether the bank, formerly the world's largest, can be profitable and effective as it unravels its business model.
Citigroup is expected to shrink by about one-third as it trims its trading operations and separates businesses and assets it no longer wants with an eye towards eventual sales, a person familiar with the bank's plans said.
The crisis forced Citigroup into talks with Morgan Stanley to merge their brokerages.
Deutsche Bank posted a surprise fourth-quarter loss of more than $6 billion (4.1 billion pounds), while analysts at Morgan Stanley forecast HSBC, Europe's biggest bank, may need to raise up to $30 billion in a stock offering.
The German government was set to take a stake in Hypo Real Estate, sources with knowledge of the matter told Reuters. The move would mark the second partial nationalization of a German bank this year.
Citigroup's shares fell below $5, to their lowest level since it won a government rescue in November, and HSBC shares fell 8 percent. Deutsche Bank shares fell 9 percent.
Corporations also are struggling to overcome sluggish economies. U.S. automaker Chrysler was in talks to sell assets to Renault-Nissan and parts supplier Magna, sources with knowledge of the deal have told Reuters, although the French automaker denied such talks were under way.
The crisis finally landed in Canada, taking down one of the country's biggest icons. Nortel Networks, North America's biggest telephone equipment maker, filed for bankruptcy, hoping to save a once high-flying business whose long decline accelerated with the crisis.
A number of Nortel affiliates also filed for protection from creditors.
Flagging economic demand led crude oil prices to fall more than 4 percent to almost $36 a barrel, while U.S. stocks slid more than 3 percent as worries about Citigroup ignited fresh fears about the battered banking sector.
(Reporting by Lucia Mutikani in Washington, Poornima Gupta in Detroit, Pascale Denis in Paris, Matthias Sobolewski in Berlin, John O'Donnell and Carrel in Frankfurt, and Jonathan Stempel and Richard Leong in New York, Editing by Chizu Nomiyama)
