Economy

Shares slump as Wall Street tumbles, global car industry crashing, RBA talks things up: Economy roundup

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Australian shares have fallen 4% in early trade after Wall Street closed at five-and-a-half year lows over fears the car industry is close to collapse.

Australian shares have fallen 4% in early trade after Wall Street closed at five-and-a-half year lows over fears the car industry is close to collapse.

The Dow Jones Industrial Average plummeted 5.07% following the testimonies of the leaders of GM, Ford and Chrysler in Congress.

The three CEOs spoke before the House Financial Services Committee, arguing it will be cheaper for the Government to lend the three companies $US25 billion than letting these companies collapse. While the three groups are aiming to draw the $US25 billion from the $US700 billion bailout passed by Congress six weeks ago, House Republicans are hesitant to sign on.

Chrysler chief executive Robert Nadelli said: “Without immediate bridge financing support, Chrysler’s liquidity could fall below the level necessary to sustain operations in the ordinary course.”

“If the domestic auto industry were allowed to fail,” GM chief executive Rick Wagoner said, “the societal costs would be catastrophic.”

The economic data out of the US was also grim, with consumer prices dropping 1% in October – the biggest drop in 61 years – and the Federal Reserve’s Open Markets Committee revealing it has downgraded growth forecasts for 2009-10.

The Fed now expects GDP growth of between zero to 0.3% for 2008, compared to its projection in June of 1% to 1.6%. It also expects GDP to shrink 0.2% in 2009.

The Fed cut the official interest rate to 1% from 1.5% at last month’s meeting, but is now expected to cut rates by half a percentage point at its 16 December meeting.

Australia’s sharemarket followed Wall Street down, dropping 4% in the hour after the maker opened. The benchmark S&P/ASX200 index was down 96.8 points or 2.77% to 3402.8 at 12.10 AEDT, while the dollar was trading at $US64 cents.

NAB shares fell 4.5% to $18.80, while Commonwealth Bank dropped 4.8% to $29.45. Westpac fell 4.9% to $15.45.

One winner of the morning was engineering group Bradken, which jumped 6.9% to $3.08.

Despite the bad news, Reserve Bank of Australia Governor Glenn Stevens says Australia “should not talk itself into unnecessary economic weakness”.

“Yes, the situation is serious. But… the long run prospects for the Australian economy have not deteriorated to the extent that might be suggested by the extent of some of the gloomy talk that is around,” he said in a speech to the Committee for Economic Development of Australia.

Meanwhile, investment firm Babcock & Brown is currently in a trading halt following a bank deposit dispute.

“We are in a dispute with a bank which holds a deposit of material amount relating to the release of that deposit,” Babcock said in a statement. The trading halt will finalise either 24 November or when the matter is settled.

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