EU offers stimulus, China cuts rates amid grim US news

More grim economic news emerged from the United States Wednesday as European leaders proposed a fresh stimulus package and China slashed interest rates in a global push to ease the slowdown.

A report on the eve of the national Thanksgiving holiday showed US consumer spending dropped 1.0 percent in October, the steepest fall since September 2001.

It foreshadowed a dismal beginning to the fourth quarter for the world's largest US economy, which is reliant on consumer spending for around two-thirds of economic activity.

A day after the US Federal Reserve said it would pump 800 billion dollars more into financial markets, the European Union in its turn unveiled a 200-billion-euro (259 billion dollar) stimulus package.

"Coordinated European action can and will make a difference," commission chief Jose Manuel Barroso stressed as he put forward the wide-ranging EU package. "Business as usual is not an option."

But the news from the United States took the cheer out of the official start to the holiday season, usually the busiest time of year for retailers.

Ian Shepherdson, economist at High Frequency Economics, called the consumer spending report "horrible" and said much of the drop was linked to weak auto sales.

But because of falling prices -- an inflation index linked to the report showed a 0.6 percent decline -- Shepherdson said "the fall in real spending was 0.6 percent after rounding, not quite as massive as the nominal plunge."

Other US reports made equally depressing reading.

The Commerce Department said orders for big-ticket durable goods fell a whopping 6.2 percent in October, a further bad sign for manufacturing.

The drop in durable goods -- such as planes, automobiles and appliances -- was sharper than the 2.5 percent decline expected on Wall Street.

This suggest weaker capital investment and more job cuts as the downward economic spiral accelerates, analysts said.

"Demand is evaporating not just domestically but globally for big-ticket capital equipment investments," said Nigel Gault at IHS Global Insight.

"We expect to see double-digit rates of decline in business equipment spending in both the fourth quarter and the first quarter."

"The combination of sharp declines in consumer spending and capital goods shipments in October points to a very weak fourth-quarter GDP report and, at this point, we think a decline in the neighborhood of 4.0 in real GDP looks likely in the fourth quarter," said John Ryding at RDQ Economics.

Countries across the world have launched tax and spending programs designed to encourage spending and business activity, with a coordinated EU-wide plan seen as more effective than individual country efforts.

Of the EU's total package, 170 billion euros will come from national government budgets and about 30 billion euros from the budgets of the EU and the European Investment Bank.

But German Chancellor Angela Merkel warned against a "race" between European Union states over the size of their economic stimulus packages, insisting Berlin was already pulling its weight.

"We should not fall into a race of billions (of euros)," Merkel said as the European Commission put forward its sweeping package.

Merkel said Germany needed "a policy of moderation, centrism and practical reason" to face what economists say could be the worst downturn since the Great Depression in the 1930s.

China launched a 586-billion-dollar economic stimulus package in early November and the country's central bank on Wednesday announced an unusually large cut of 1.08 percentage points to interest rates.

It was China's fourth interest rate cut since mid-September and the deepest rate cut since October 1997.

On world stock markets, European shares were lower while Asian markets closed mixed.

In European trade, Frankfurt shed 1.06 percent, Paris dipped 2.15 percent and London lost 1.84 percent near the half-way stage.

In Asia, Tokyo finished 1.3 percent lower and Sydney slipped 2.3 percent, while Hong Kong won 3.8 percent, Mumbai added 3.81 percent and Seoul jumped 4.7 percent.

On Wall Street, traders looked past the bleak data and sent the Dow Jones industrial up 1.98 percent ahead of the close.

British Prime Minister Gordon Brown meanwhile announced the Group of 20 countries would hold further summit talks on the crisis in London on April 2 next year.