U.S., UK recessions deepen

WASHINGTON/SINGAPORE (Reuters) - Bleak housing data showed the United States and Britain were sinking deeper into recession and authorities from Washington to Tokyo worked hard to spend their way out of the worst downturn in decades.

Japan's government on Wednesday approved its biggest-ever budget to revive its economy while U.S. President-elect Barack Obama sought to clinch a deal with congressional lawmakers on a massive stimulus package before the Christmas Day.

A record drop in U.S. existing home sales and prices last month reported on Tuesday showed the world's biggest economy was on track for what one Federal Reserve official said could be the longest downturn since the World War Two.

Housing is at the root of the year-long U.S. slump and the global malaise and economists expect the economy to decline much more in the current quarter after a 0.5 percent contraction in the third quarter. Britain, the world's fifth-largest economy, is in an equally dire shape.

The Royal Institution of Chartered Surveyors said house prices were set to fall by 10 percent next year, confirming the bleak outlook after Tuesday's data showed the economy shrinking by 0.6 percent in the third quarter.

"Lenders are likely to remain cautious in the near term. This, coupled with an increasingly gloomy economic picture, suggests that house prices will continue to decline in 2009," RICS chief economist Simon Rubinsohn said.

The relentless flow of bad news overshadowed rescue efforts and prompted a warning from European Central Bank President Jean-Claude Trichet that investors could be overlooking the importance of steps already taken by policymakers.

Japan had its share of gloom this week, reporting a record drop in exports -- the mainstay of an economy dogged by weak consumer spending -- and a similarly sharp collapse in business sentiment.

RECORD BUDGET

Grim data and warnings from central bank governor Masaaki Shirakawa fanned expectations that the central bank will cut its key rate to zero from 0.1 percent and revive a policy of flooding banks with interest free cash it abandoned just two years ago.

Doing its part, Japan's cabinet approved a record 88.5 trillion yen ($980.6 billion) budget for the next fiscal year starting in April, designed to accommodate part of 12 trillion yen in extra spending on government stimulus packages.

But markets were skeptical whether unpopular Prime Minister Taro Aso will have the political muscle to push the budget and other related bills through a divided parliament.

In Washington, Barack Obama's team was nearing agreement with congressional Democrats on a huge emergency spending bill intended to jolt the weak U.S. economy and create 3 million jobs over two years, Vice President-elect Joe Biden said on Tuesday.

Asked whether an agreement would be reached by Christmas, Biden said: "I think we're getting awful close to that."

In recent days, government sources have talked about moving a bill through Congress next month with a price tag in the range of $675 billion to $775 billion over two years.

But rounds of aggressive interest rate cuts, bank bailouts, and massive spending totaling trillions of dollars, have failed to cheer up investors pounded by a daily barrage of news of layoffs, corporate losses and grim economic statistics.

On Tuesday, Spain, Europe's fifth-largest economy, declared it had stumbled into recession and New Zealand data showed it was suffering its worst contraction in eight years.

PRAYER FOR VICTIMS

In a telling sign how bad things have become, Australia's religious leaders saw it necessary to speak up, calling for support for victims of the financial crisis and asking "how the international captains of finance could have got it so wrong."

"We celebrate Christmas this year at a time of economic turbulence throughout the world unknown since the 1930s," said Catholic Archbishop of Sydney Cardinal George Pell.

"This situation is unlikely to improve quickly, even here in Australia, so our first thoughts should be with those who have already lost their jobs," he said.

Markets, resigned to the fact that emergency action may fail to prevent the worst global downturn since the Great Depression, struggled for direction on Wednesday as investors looked forward to the end of a horrid 2008.

Stocks in Hong Kong and Sydney rose on the last day before the Christmas holiday but Tokyo followed Wall Street lower, losing 2.7 percent.

Investors dumped Toyota and other auto-related stocks after the world's top carmaker forecast its first-ever annual operating loss.

ECB chief Jean-Claude Trichet said markets were underestimating the impact of central banks' and governments' response to the financial crisis.

"There is an underestimation in the financial sphere of the very great importance of the decisions that were taken," Trichet told said in a speech at a Paris think-tank on Tuesday. He said banks were still "very influenced" by mistrust that had set in from mid-September when the crisis culminated with the bankruptcy of Lehman Brothers.

(Reporting by Reuters bureaus around the world; Writing by Tomasz Janowski; Editing by Lincoln Feast)