US economy shrinks, Japan unveils 277bn dollar package

The US economy shrank by 0.3 percent in the third quarter, official figures showed on Thursday, as Japan unveiled a 277 billion dollar package aimed at helping it ride out the global economic storm.

While markets were buoyed by a rates cut in the US, a survey showed underlying confidence among consumers and businesses in the European Union had declined to a 15-year-low.

The leaders of Europe's two largest economies, German Chancellor Angela Merkel and British Prime Minister Gordon Brown, were meanwhile meeting to determine how to respond jointly to the global financial crisis.

"Today's GDP report is weak, but it is not unexpected," White House spokeswoman Dana Perino said of US Commerce Department data showing the US gross domestic product dropped for the first since time since the fourth quarter of 2007.

Some analysts said the drop could be just the start of a deep and painful recession in the world's biggest economy.

"A heftier decline in real GDP is likely in the fourth quarter, which will confirm that the US economy is in recession," said Dawn Desjardins, economist at RBC Capital Markets.

In Japan, the world's second biggest economy, the government unveiled a near a 26.9 trillion yen (277 billion dollar/208 billion euro) package to cope with what Prime Minister Taro Aso called a "once-in-a-century event."

The measures included tax cuts, benefits sent directly to households and loans for small businesses, he told a news conference.

"In this kind of situation, we need to relieve people's insecurities. We should not be fearful of the violent storm, nor should we just stand and let the typhoon blow us away."

Japan's Nikkei stock index closed up 9.96 percent, extending its rebound into a third day, while stocks in South Korea leapt 11.95 percent and Hong Kong shares closed 12.8 percent higher.

There were also jumps in all Europe's major markets, with the Frankfurt market gaining 4.18 percent, London up 2.05 percent and Paris rising 2.12 percent in mid-afternoon deals.

Despite the news of the contraction, US stocks opened with a bounce with the Dow Jones Industrial Average up 2.16 percent to 9,184.91 in opening trades and the Nasdaq 2.30 percent stronger at 1,695.26.

Markets were reacting to Wednesday's decision by the US Federal Reserve to slice its key interest rate by 50 basis points to 1.0 percent -- the second cut this month -- to stimulate the world's biggest economy.

"The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures," Ben Bernanke said after the unanimous vote.

The unusually bleak assessment of the economy from the Fed chairman led some analysts to suggest there could be further rate cuts as the central bank battles to revive economic growth and stave off the threat of deflation.

There was a similarly gloomy forecast from France's Budget Minister Eric Woerth who told a radio station that "there is an extraordinarily strong slowing of the economy and we have to fight that above all."

French President Nicolas Sarkozy has put forward a string of proposals to stimulate growth, including the creation of 100,000 new public sector jobs and a national sovereign wealth fund to shelter leading companies from the turmoil.

Germany is to unveil its own package next week after Merkel promised a "targeted, courageous and sustainable" scheme to help avert a deep recession.

The country's biggest bank, Deutsche Bank, reported a 75 percent slump in net profits as it unveiled its third-quarter results after the financial crisis forced it to take new write-downs of 1.2 billion euros.

In Britain, a survey by Nationwide bank showed house prices fell a record 14.6 percent in October from the equivalent level 12 months ago.

The looming recession was taking a heavy toll on European business and consumer confidence, which plunged in October to the lowest level since 1993, according to figures from the European Commission.

But amid all the gloom, Nobel economics laureate Robert Mundell said the worst of the world economic crisis is over.

"The real economy has not collapsed. The worst is behind us," he said in South Korea.