Threat of double-dip recession grows as global share prices fall

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£64bn was wiped off the value of Britain's leading shares yesterday as panic about the prospect of a double-dip recession gripped global markets.

Every share in the FTSE 100 index of top companies fell as alarm over stagnating European output and a slowdown in China was piled on top of grim news for the ailing US economy.

The tumbling share prices spell dire news for Britain's pension funds and are evidence of collapsing economic confidence. The prospect of a second severe recession threatens British families with job cuts, falling living standards and renewed falls in house prices.

Faced with dreadful news from Europe, the US and Asia, traders sold shares and piled money into safe havens such as US government bonds.

There was frenzied demand for US government debt, always seen by traders as the safest asset to hold in a market sell-off, with the result that interest yields on US Treasuries were at their lowest since the 1940s.

Christine Lagarde, managing director of the International Monetary Fund, warned that the global economy was heading for "a dangerous phase" and called on governments to work together to ward off the impending crisis as they did in 2008.

The blue-chip FTSE 100 plunged 4.7 per cent, the biggest drop since March 2009 when markets were in the depths of the financial crisis.

In New York the Dow Jones Industrial Average finished the day down 3.51 per cent. Hong Kong's Hang Seng index closed down 4.9 per cent and Japan's Nikkei 225 fell 2.1 per cent.

A survey of European companies showed activity grinding to a halt and the eurozone on the brink of a fresh recession. The dire news from Britain's biggest trading partner followed a warning by the US central bank late on Wednesday that the world's biggest economy was in trouble.

The global panic extended to Asia where Chinese industrial activity slowed for the third month running. In Britain, manufacturing output slowed more severely than expected, adding to fears that the economy is already flatlining as the Government's austerity measures kick in.

Giles Watts, head of UK equities at traders City Index, said: "The deterioration of manufacturing data ... shown today by China, Germany and France has emphasised the risk that global economies could be slipping back into recession mode."

The fresh evidence of a global slowdown added to existing fears that a default by Greece would trigger a eurozone crisis. Delays in dealing with the crisis have caused market confidence to crumble.

Kenneth Rogoff, a former International Monetary Fund economist who predicted the fall of Lehman Brothers in 2008, said the biggest risk to the eurozone was a run on southern European banks.

David Cameron yesterday joined the leaders of six other G20 nations – Australia, Canada, Indonesia, Mexico, South Africa and South Korea – in calling on French President Nicolas Sarkozy, the current head of the G20, for swift action to resolve the debt crisis in the single currency area, and for Washington to act to put the US finances on a sustainable path.

Mr Cameron said countries had to "face up to the debts, face up to the deficits, face up to the problems". He said: "Every country in the world has got to do that in a co-ordinated way so we can get growth moving."