Exceptionally poor econ-omic data from America pushed equity markets sharply lower yesterday.
The FTSE 100 index closed 106.1 points down, at 6270.7, wiping out most of the gains of the past few days. Frankfurt and Paris were similarly depressed, while in New York few stocks escaped the sell-off.
The news will concentrate the minds of the Bank of England's Monetary Policy Committee and the council of the European Central Bank; both are due to set interest rates today. There seems to be little chance that they will raise rates to curb domestic inflationary pressures. Meanwhile, the American Federal Reserve is due to decide rates on 18 September and looks likely to cut them, to ease the pressure on homeowners and the credit markets.
America's housing market is moving into a steeper decline. The National Association of Realtors' Pending Home Sales Index, based on contracts signed in July, fell to a reading of 89.9, the lowest reading since September 2001 when America was last in recession. The fall was much bigger than the 2 per cent decline economists were expecting.
"Things are as bad as people had been fearing," said Ken Landon, global foreign exchange strategist at JP Morgan Chase in New York.
The plunge in home sales is more worrying because it is "BC", or before crunch, with the likelihood of worse to follow as borrowers tighten up on lending.
The gloom was compounded by the US jobs market; the ADP National Employment survey showed private employers added 38,000 jobs last month, well short of the 83,000 economists had forecast.
The starkest intimation of a recession came from the Organisation for Economic Cooperation and Development which lowered its forecasts for economic growth in the US and Europe and said they may be reduced further following the collapse of US sub-prime mortgages. The OECD trimmed its 2007 forecast for the US to 1.9 per cent from a May figure of 2.1 per cent.
Jean-Philippe Cotis, the OECD's chief economist said that "it's difficult to say" if the US economy is headed for recession and said economic growth in Europe has peaked. The forecast for UK growth was revised from 2.7 per cent to 3.1 per cent.