The Irish Independent reports that homeowners will enjoy a reduction of up to €400 a month on their mortgage repayments by the middle of next year, economists predicted last night.
Yesterday, the European Central Bank cut its main rate by 0.5pc, from 3.75pc to 3.25pc.
This means most borrowers will immediately benefit from lower repayments, worth between €50 and €150 a month. And ECB President Jean-Claude Trichet strongly hinted at another rate cut next month.
Economists now expect the ECB to go on cutting, with rates set to go as low as 2pc by the middle of next year.
Banks charge their customers upwards of 1.25pc above the ECB rate, depending on the type of mortgage.
Yesterday's cut means thousands will drop to the new 4.5pc rate for their mortgages.
And a 2pc ECB rate next year would translate into 3.25pc for those on typical tracker mortgages.
That would mean a cumulative €400 reduction in monthly payments, compared with what homeowners were enduring before last month's ECB cut was announced. All the main banks immediately promised to pass on yesterday's cut.
The reduction means a homeowner on a €300,000 tracker mortgage will benefit from a monthly repayment fall by €90.
This is in addition to the October cut, which also reduced the repayments by another €90.
The ECB has now cut rates by 1pc inside a month. It has never before cut rates by this much, this quickly.
Economists expect rates to continue to be reduced well into next year, with most now predicting a cut in December, and another two 0.5pc cuts in the early part of next year.
Mr Trichet said the ECB was not pre-committed to any decision and noted that December's rate-setting meeting would have new ECB economic forecasts to work with.
"I don't exclude that we could decrease rates again but ... we are not pre-committed in any respect," he said. "We will do whatever is necessary to take into account the situation as it will unfold progressively."
After yesterday's move, interest rates in the 15 euro zone countries stand at 3.25pc, the lowest in over two years.
However, yesterday's ECB rate cut was less dramatic than the rate reduction in Britain.
Hours before the ECB moved, the Bank of England pulled its rates down by 1.5pc, to 3pc.
It was the largest cut in rates in Britain since the early 1980s. The aggressive rates cut by the Bank of England and the US Federal Reserve have piled pressure on the ECB to bring European rates to similar levels.
Economist with KBC Bank (formerly IIB Bank) Austin Hughes said the indications from the ECB were that there would be another rate cut in December. And Mr Hughes now expects another two rate cuts early in new year.
Bank of Ireland economist Dan McLaughlin and Ulster Bank's Simon Barry both expect ECB rates to have fallen to 2pc next year.
Yesterday, all the main banks said they would pass on the latest ECB rate cut to customers.
Committed
Those with tracker mortgages will automatically see their mortgages cut. But all the main banks also committed to cutting standard variable rates -- mortgages where banks do not have to pass on rate cuts -- by the full 0.5pc.
AIB, Halifax Bank of Scotland, EBS Building Society, Permanent TSB, Bank of Ireland and its subsidiary ICS Building Society, National Irish Bank, EBS, Irish Nationwide, KBC Homeloans (formerly IIB Homeloans), Ulster Bank and First Active all said they would pass on the full rate cut.
Banks came under sustained pressure last month when the ECB and other central banks cut rates. Most banks spent days fending off calls to pass on the rates cuts until they eventually yielded to pressure.
The Irish Independent also reports that KBC Group revealed yesterday that 2.5pc of its €13.6bn Irish homeloans were at least three months in arrears -- more than double the average rate of the Belgian financial giant's total mortgage book.
The average loan-to-value at KBC Homeloans (formerly IIB Homeloans) stood at 76pc at the end of September, a third higher the group average.
Some 95pc of the bank's mortgages are carried out through the broker channel, and industry sources suggest about a fifth of the book is made up of the previously-booming buy-to-let market.
Details of the performance of the Irish mortgage book were contained in slides prepared for analysts yesterday as Brussels-based KBC Group unveiled the first loss since it was created in a 1988 merger.
The average LTV in its €28bn Belgian mortgage book stands at 50pc, while 'non-performing loans' -- where payments are at least 90 days behind -- are at only 0.5pc.
Market observers expect to get a clearer picture of the quality of the Irish mortgage market, which has held up well despite the deteriorating economy, when Irish Life & Permanent issues a trading update next week.
The country's biggest mortgage provider said in August that there had been "no significant change" in arrears in its Irish book in the first half.
Non-performing loans made up 0.9pc of the Irish portfolio at the end of last December.
KBC Group, in which the Belgian government recently injected €3.5bn to shore up its finances, posted a third-quarter net loss of €906m, compared with a profit of €630m for the same period last year.
The quarterly loss was caused by €1.4bn in impairments on a net basis from losses in structured credit holdings, which were affected by the global financial crisis.
The group, which also has an asset management business in Dublin, has booked a €50m writedown on a 2pc stake held in Irish Life & Permanent so far this year. Some €48m of the IL&P hit was taken in the three months to the end of June, with the remainder booked in the subsequent quarter.
The Irish group's shares tumbled 61pc over the course of the six months, in line with a sell-off across the wider financial sector.
Shares in KBC are down by a half since mid-September, when the global financial crisis deepened and triggered the nationalisation or capitalisation of financial companies by governments, but are up 30pc from the 12-year lows recorded just before it took the government capital injection.
Chief executive Andre Bergen said that KBC's investments in central and eastern Europe helped to support the business, and that it would continue to focus on the area, as well as strengthening its home Belgian market.
The Irish Times reports that the European Central Bank announced a rate cut of half a percentage point to 3.25 per cent yesterday in a bid to stimulate economic growth in the euro zone area.
But the move failed to stop European stocks from continuing their fall yesterday afternoon as the bank's president, Jean-Claude Trichet, warned of more financial shocks to come. "The level of uncertainty stemming from financial market developments remains extraordinarily high and exceptional challenges lie ahead," he said after a meeting of the bank's governing council in Frankfurt.
Mr Trichet said further rate cuts could be on the way and urged banks to lend money. "We expect the banking sector to make its contribution to restore confidence." The governing council discussed cutting rates by 75 basis points but, "after having checked and discussed the pros and cons of those different options, we decided unanimously that it was appropriate to decrease by 50 basis points", he said.
The rate cut follows the co-ordinated rate cut on October 8th with the US Federal Reserve and five other central banks in an attempt to halt a global slowdown.
Mr Trichet said inflation, which peaked at 4 per cent over the summer, was now easing and was expected to drop further next year in line with the decline in energy and food prices. "The outlook for price stability has improved further. Inflation rates are expected to continue to decline in the coming months, reaching a level in line with price stability during the course of 2009," he said. Inflation in October fell to 3.2 per cent but is off the ECB target of 2 per cent.
The ECB rate cut followed the Bank of England's cut of 150 basis points. The Swiss National Bank yesterday cut its interest rate by 50 basis points to 2 per cent, only the second cut since March 2003. Denmark's central bank cut rates by 50 basis points to 5 per cent, reversing an increase just two weeks ago. The Czech Republic's central bank cut its rate by 75 basis points to 2.75 per cent.
The cuts come as the European Commission this week predicted a sharp drop in the EU's GDP growth in 2009, falling investment and consumption and a rise in unemployment.
EU leaders will meet in Brussels today to discuss how to reform the global financial system to prevent such a crisis from happening again. The informal summit is intended to agree a common EU position ahead of Thursday's summit in Washington of the G20 industrialised and emerging economies. But while EU member states broadly agree on the need for greater transparency on the financial industry and reform of the international financial institutions, such as the International Monetary Fund, different views exist on regulation of the industry. In addition to a position paper by France, which currently holds the EU's rotating presidency, on how to reform the global system, there are British and Dutch papers.
The French paper to be submitted today is a revised version following concerns raised by finance ministers on Tuesday over a proposal which some said could signal a move towards global economic governance.
The Irish Times also reports that Airtricity founder Eddie O'Connor's latest energy venture has signed a €785 million deal to develop wind farms in Chile.
Mainstream Renewable Power, set up by Mr O'Connor in February with the bulk of the €50 million he earned from the sale of Airtricity's businesses in the US and Europe last year, said that it has signed a $1 billion (€785 million) joint venture deal in Chile with local player Andes Energy.
The pair plan to develop wind farms with the capacity to generate 400 mega watts (MW) of electricity - enough power for about 217,000 homes according to the company's own figures.
Mainstream said yesterday that this would include a 35MW wind farm in the Valparaiso region of the country, which is due to come on stream within two years.
The company said yesterday that it will produce enough electricity for over 19,000 homes.
Under the deal's terms, Mainstream Renewable Power will hold a 90 per cent stake in the venture, while Andes Energy will hold the remaining 10 per cent.
Commenting on the deal yesterday, Mr O'Connor said that the company had chosen Chile because its government is putting the "optimum support structures" in place for renewable energy.
Most developed countries support renewable energy by putting in place guaranteed tariffs for the power produced, which help to underpin revenues and make these operations attractive investments. The charges are ultimately passed on to consumers.
Mr O'Connor set up Mainstream Renewable Power with former Airtricity corporate finance manager Fintan Whelan early this year, soon after completing the sale of their original company to Scottish Southern Energy for €1 billion.
Backers include Barclays Bank, which recently bought a 15 per cent stake for €20 million, giving it an overall value of €130 million. The bank bought during a €40 million fund-raising that included a cash injection from directors, managers and associates.
Analysts believe that higher commercial lending rates mean that it is no longer likely that renewable energy companies will command the kind of price that Airtricity earned last year.
The Irish Examiner reports that the founders of Dublin mobile phone company, ChangingWorlds look set for a multi-million euro windfall following the sale of their company for €47 million.
ChangingWorlds, which has been bought by American-based Amdocs, was founded by Barry Smyth, who is still its chief scientist and Paul Cotter, who spun the company out of University College Dublin in 1999.
As part of the deal software firm, Amdocs will also pay $11.6m (€9.1m) to Irish private equity group TVC Holdings, which invested seed capital in ChangingWorlds in 2000.
That figure could grow to $16.4m which is 3.7 times TVC’s original investment.
ChangingWorlds, based in Leopardstown, Co Dublin counts Vodafone and Sprint among its customers.
Its patented technology automatically builds subscriber profiles, based on user behaviour and usage patterns requiring no user input or action.
One use of ChangingWorlds’ technology is that it enables sports fans put a link on their homepage giving them the latest information about their favourite football team.
Amdocs intends to expand the technology to mobile and television.
The acquisition is expected to close during Amdocs’ fiscal quarter ending December 31, 2008.
The Financial Times reports that interest rates were slashed across Europe on Thursday as the continent’s central bankers decided the outlook for their economies had taken a decisive turn for the worse.
In the UK, the Bank of England cut rates by 1.5 percentage points to 3 per cent, bringing the official rate to its lowest level in 54 years. The cut was three times bigger than any seen since the central bank’s monetary policy committee was established in 1997.
The European Central Bank cut official borrowing costs by half a percentage point to 3.25 per cent and Jean-Claude Trichet, ECB president, said he would not “exclude” a further cut in December.
In other moves, the Czech central bank unveiled a much larger than expected three-quarter percentage point cut in official borrowing costs, while the Swiss National Bank also said it was lowering interest rates.
The rate cuts came as the International Monetary Fund published an emergency update of its economic forecasts, predicting the rich world’s economies would shrink by 0.3 per cent next year, the first contraction since the second world war. Last month it projected 0.5 per cent growth for 2009.
The IMF recommended the US, Europe and China should raise public spending and cut taxes.
As the IMF was predicting a dire year ahead for rich economies, fresh signs emerged of the pain in the US jobs market. The number of Americans filing new claims for unemployment benefits remained more than 50 per cent higher than before the financial crisis hit in 2007 as the insured unemployment rate climbed to its highest level since February 1983.
Equity marketsslumped amid traders’ expectations that the weakness in the global economy would hit corporate profits.
In London, the FTSE 100 index closed 5.7 per cent lower at 4,272.
But this was not simply a reaction to the Bank of England’s dramatic rate cut. German and French equity values both fell more than 6 per cent. The S&P 500 index ended the day 5.2 per cent lower at 903.43.
The Bank of England said its dramatic move was a response to tightening credit conditions; the evidence of a “severe contraction” in the economy over coming months; and such a dramatic extinction of inflationary pressure that “at prevailing market interest rates, [there is] a substantial risk of undershooting the inflation target”.
Traders and economists took that final phrase to signify further rate cuts to come as the prevailing market interest rates already envisaged rates falling to 2.5 per cent. Market expectations are now for rates to fall below 2 per cent over the next year.
Speaking after the ECB’s move, Mr Trichet was clear that banks had to respond to lower official rates by bringing down market interest rates. “We expect the banking sector to make its contribution to restore confidence,” he said. He highlighted the large sums still being deposited by banks at the ECB overnight – rather than being lent to other banks – as a sign that markets were not functioning normally.
The ECB’s strategy contrasted with that of the Bank of England, which does not expect a change in the market to come soon and as a result has cut rates even further.
The size of the cut in UK interest rates appeared to have taken the ECB by surprise, but Mr Trichet played down the differences in approach. “Central banks are a brotherhood of mutual admiration, which is very strong,” he said.
IMF approves $16.4bn Ukraine loan
The FT also reports that the UK will suffer most as the financial crisis causes the world’s rich economies to shrink for the first time since the second world war, according to the International Monetary Fund.
Sharply revising down growth forecasts it made just a month ago, the IMF said the financial crisis had proved to be deeper and broader than expected, affecting growth across the developing world as well as rich economies.
The IMF predicted global growth to slow to 2.2 per cent next year, down from its previous estimate of 3 per cent, with the rich world economies contracting by 0.3 per cent, as against its former projection of a 0.5 per cent increase. The UK saw by far the sharpest downward revision and the worst projected recession in the rich world, the 2009 forecast being cut 1.2 percentage points to a fall of 1.3 per cent.
The fund stressed that because trend output growth in the rich world had slowed over recent decades, the projected downturn was not unprecedented. In terms of undershooting potential, it was comparable to the recessions in 1975 and 1982. But the IMF warned: “Financial conditions are likely to remain tight for a longer period and be more impervious to policy measures than previously expected.”
Olivier Blanchard, the IMF’s chief economist, called for fiscal policy to boost economic growth, to complement recent cuts in interest rates. “Global fiscal expansion is very much needed at this point,” he said. Nations representing about half the world’s economy including the US, European countries and China all had room to increase spending or cut taxes, the fund said.
The IMF’s economists have carved out a role for themselves as the gloom-mongers of the global economy, but even they have been taken aback by just how badly things have gone.
The IMF admitted on Thursday that there had been a few signals of hope over the past week and that attempts to arrest the slump in confidence were beginning to have some effect. But Thursday’s revisions in its forecasts came across the board.
Three themes dominated the worsening of sentiment since the fund released its last forecasts at its annual meeting in October. First, the financial crisis has continued to deepen in the rich world, with highly indebted economies like the UK particularly vulnerable. Second, commodity prices have fallen, which has hurt oil exporters like Russia and countries in sub-Saharan Africa dependent on selling raw materials abroad. Finally, a general souring of sentiment has hit all emerging markets, particularly those dependent on foreign investors to finance current account deficits.
The mood changes so quickly in global equity and bond markets, and hence affects so rapidly the outlook for countries dependent on external financing, that almost any firm forecast risks being reversed rapidly.
Until a day or two ago, investor sentiment surrounding the developing world had actually been improving rapidly for a week. Emerging market government bonds had experienced their biggest rally since 2001. A key measure of risk, JP Morgan’s so-called “EMBI+” index, showed the extra returns demanded by investors for holding emerging market assets reducing from 8.6 percentage points in late October to below 6 percentage points.
But as the fund itself warns, much of the developing world remains acutely sensitive to the rich economies. A string of bad economic data over the past couple of days in the US and Europe sent equity and government bond prices in emerging markets lower again.
Some of the recovery in confidence over the past couple of weeks, market participants say, appeared due to the IMF itself. By announcing a new rapid-lending facility for crisis-hit countries, in association with the US Federal Reserve granting new currency swap lines to Brazil, South Korea, Mexico and Singapore, the fund had reassured some investors that it stood ready to head off any seriously destabilising slides in sentiment.
The New York Times reports that President-elect Barack Obamamoved swiftly on Thursday to fill his administration and form his response to the economic crisis. Mr. Obama scheduled his first post-election visit to the White House and convened an economic advisory board to meet here amid signs of a deteriorating financial outlook.
With the global economy on a knife’s edge, and labor figures on Friday very likely to show mounting American job losses, the financial markets, foreign leaders and even the Bush administration are looking to Mr. Obama for signs of how he will manage the crisis.
In responding, Mr. Obama must strike a delicate balance between cooperating with an unpopular president whose policies he campaigned to change, and the inclination to wait until he takes charge in two and a half months to prescribe his own remedies.
Adding to the pressure were steep drops in world financial markets on Thursday; the Dow Jones industrial average alone fell 443 points, or nearly 5 percent, compiling a two-day loss of nearly 1,000 points.
Moving quickly on the transition, Mr. Obama announced his selection of Representative Rahm Emanuel as his White House chief of staff. The president-elect said he had made that choice because Mr. Emanuel had “deep insights into the challenging economic issues that will be front and center for our administration.”
In a long list of forthcoming appointments, aides said, Mr. Obama is acting with the greatest urgency toward choosing a Treasury secretary and is said to be considering Lawrence H. Summers, who held the post during the Clinton administration, and Timothy F. Geithner, president of the New York Federal Reserve Bank.
Even as Mr. Obama moved toward assuming power, he was building on his commanding victory on Tuesday. He added North Carolina to his column, according an analysis of the election returns by The New York Times, capping an extraordinary campaign in a state that had not voted for a Democrat for president since 1976.
The vote totals in North Carolina showed 49.9 percent for Mr. Obama and 49.5 percent for Senator John McCain, who was his Republican opponent. In his election to be the nation’s 44th president, Mr. Obama had 364 electoral votes to Mr. McCain’s 162, with 12 still to be decided — 11 in Missouri and one in Nebraska.
Mr. Obama announced that he would hold his first post-election news conference on Friday afternoon, but he remained largely out of sight on Thursday as a newly fortified Secret Service detail spirited him through Chicago. He arrived at the Federal Bureau of Investigation regional headquarters here to receive his first president’s daily brief from Mike McConnell, the director of national intelligence.
The transfer of power took place on two fronts, with President Bush summoning members of the White House staff to the South Lawn, where he pledged to make an “unprecedented effort” to ensure a smooth transition in the first handover of the presidency since the Sept. 11, 2001, attacks. Mr. Bush said he would welcome Mr. Obama at the White House on Monday, the earliest such meeting after any recent presidential election.
“We face economic challenges that will not pause to let a new president settle in,” Mr. Bush said. “This will also be America’s first wartime transition in four decades.”
Mr. Obama, who has declined to attend the president’s global economic summit meeting on Nov. 15, said he looked forward to meeting with Mr. Bush and the first lady, Laura Bush, at what might be the only get-together by the president and his successor before Inauguration Day.
“I thank him for reaching out in the spirit of bipartisanship that will be required to meet the many challenges we face as a nation,” said Mr. Obama, adding that his wife, Michelle, will join him as he visits the Oval Office and the rest of their future residence. Their two daughters will not be taken out of school for the trip.
No incoming president in modern times has been so pressured to begin governing, in effect, before he is sworn into office. With that in mind, Mr. Obama and Vice President-elect Joseph R. Biden Jr. will meet on Friday with members of a new economic advisory board.
The group, assembled to offer wide-ranging advice, includes the billionaire investor Warren Buffett; Mr. Summers and his predecessor as Treasury secretary, Robert E. Rubin; Paul A. Volcker, a former Federal Reserve chairman; and Eric E. Schmidt, the chief executive of Google.
Participants will also include Mayor Antonio R. Villaraigosa of Los Angeles and Gov. Jennifer M. Granholm of Michigan.
Ms. Granholm is a strong proponent of a stimulus package in the lame-duck Congressional session. Previewing her advice to Mr. Obama, she sent a letter on Thursday to Congressional leaders urging them to finance public infrastructure projects, extend unemployment and food stamp benefits and provide aid to states and more assistance for the troubled auto industry.
“Michigan, and every state, needs swift action and leadership from Washington to address the short term challenges our national and state economies are facing,” Ms. Granholm wrote.
While Mr. Obama is focusing heavily on the economy, advisers said he is working on all areas of his administration. He spent Thursday afternoon making and receiving calls, his time divided with the same precise scheduling he used during his highly disciplined presidential campaign.
In a makeshift office in Chicago, he also spoke to nine world leaders, including President Nicolas Sarkozy of France, Prime Minister Gordon Brown of Britain, Prime Minister Ehud Olmert of Israel and Chancellor Angela Merkel of Germany.
Mr. Obama is trying to build his team amid the fevered speculation that typically grips Washington during times of transition about who will fill the new administration, where names are often floated with little bearing on the actual selection process.
For example, some in Washington focused on reports that Mr. Obama might name former Secretary of State Colin L. Powell, a Republican who endorsed him before the election, as his education secretary. But one of Mr. Powell’s closest friends shot that idea down Thursday.
“Fuhgeddaboutit,” Kenneth M. Duberstein, a former Reagan White House chief of staff, said in his best Brooklyn accent. “What he has told everybody is he is not a candidate for anything.”
Mr. Obama, however, was set to place two of his top advisers near him in the Oval Office. David Axelrod is going to assume a position of senior adviser to the president, officials said, and Robert Gibbs is poised to be named White House press secretary.
On the economy, Mr. Obama is working with Democratic leaders in Congress who are making plans for two stimulus packages. The first would be smaller, perhaps up to $100 billion, to be passed in a lame-duck session this month in hopes of getting Mr. Bush’s signature. The second would be larger, including tax cuts for low- and middle-income workers, to be ready as soon as late January.
Mr. Obama is coordinating with Congressional Democrats behind the scenes on the stimulus plans, which would include more jobless benefits, food stamps, aid to financially strapped states and cities, and spending for infrastructure projects that keep people at work. His chief liaison has been Mr. Emanuel.
“You don’t ever want a crisis to go to waste; it’s an opportunity to do important things that you would otherwise avoid,” Mr. Emanuel said in an interview. “In 1974 and 1978 we never dealt with it, and our dependence on foreign oil never changed.”
Although the cooperation with the Democratic-controlled Congress is expected to go smoothly, the coordination with the Bush White House is a dicier matter. The Obama camp is feeling pressure from the administration, according to several people familiar with the situation, specifically from Treasury Secretary Henry M. Paulson Jr., to “co-own” the bailout program, which remains unpopular among voters despite a broad consensus that it was essential to avert wider economic collapse.
The Treasury has reserved office space, so far unused, for Obama representatives. Mr. Paulson has sought Mr. Obama’s advice into the choice of a permanent director of the bailout program, and a commitment that Mr. Obama, once he is president, will keep the person on.
No decisions have been made about how Mr. Obama should proceed, advisers say, and Friday’s session with the Obama economic board is not expected to settle matters. Having promised change, Mr. Obama is not eager to join hands with Mr. Bush on the bailout.
But several Democrats said for Mr. Obama to stay aloof, as Franklin D. Roosevelt did before he succeeded Herbert Hoover amid the Depression, or to criticize the actions of the Bush administration could further destabilize financial markets as they seek clarity about the government’s policies. It would also mean that the Bush administration might take actions that would bind Mr. Obama’s hands as president.
A Treasury spokeswoman, Brookly McLaughlin, in an interview disputed the suggestions that Mr. Paulson was pressuring the Obama camp. Ms. McLaughlin cited a public statement from Mr. Paulson on Thursday in which he congratulated Mr. Obama and added, “A methodical and orderly transition is in the best interests of the financial markets, and Treasury is committed to making sure that the incoming team can hit the ground running in January.”
The NYT also reports that sales at the nation’s largest retailers fell off a cliff in October, casting fresh doubt on the survival of some chains and signaling that this will probably be the weakest Christmas shopping season in decades.
The remarkable slowdown hit luxury chains that sell $5,000 designer dresses as badly as stores that offer $18 packs of underwear, suggesting that consumers at all income levels are snapping their wallets shut.
Sales at Neiman Marcus, the luxury department store, dropped nearly 28 percent in October compared with the same month last year. Sales fell 20 percent at Abercrombie & Fitch, nearly 17 percent at Saks, 16 percent at Gap and nearly that much at Nordstrom.
Of the more than two dozen major retailers that reported on Thursday, most had sales declines at stores open at least a year, the majority of the decreases in double digits. Deep discounters like Wal-Mart and BJ’s Wholesale Club reported gains.
Consumer spending represents two-thirds of the nation’s economic activity, and analysts said the striking sales declines at retailers almost certainly portended an extended, severe recession. The reports highlighted once again the depth of the economic problems confronting President-elect Barack Obama.
Consumers are cutting their spending for many reasons, but high on the list is the weakening employment picture. Even people who still have jobs are pinching pennies as they hear of layoffs among friends and family. Unemployment has hit 6.1 percent, and a new jobs report due Friday is expected to show further deterioration.
“October was every bit as bad we feared,” said John D. Morris, a retailing analyst with Wachovia. “Maybe worse. October’s numbers were so disappointing, particularly in the final week, which had to leave retailers in a state of high anxiety going into the holiday season.”
Indeed, the situation for retailers is so dire that it is creating opportunity for any consumers in a mood to spend money. Seven weeks before Christmas, stores are offering eye-catching bargains as they struggle to move merchandise.
“This is the year the consumer has been given a holiday gift beyond belief,” said Marshal Cohen, chief industry analyst for NPD Group. “You can get anything, anywhere, at any price.”
Malls are papered with sale signs, some seven feet tall and obscuring storefronts. New merchandise is being marked down before it even hits the sales floor. Stores are extending their hours and offering the kinds of deals — “doorbusters” — that are usually reserved for the day after Thanksgiving, known as Black Friday.
Kohl’swill stay open until midnight this Friday and offer an array of doorbusters, such as $250 diamond earrings for $77.99. Kmart is offering “early Black Friday” deals on Sundays, such as a Sylvania 32-inch LCD television for $439.99, instead of the usual $549.99.
Even Wal-Mart, whose sales at stores open at least a year were up 2.4 percent in October, began a big discount program on Thursday, lowering prices on thousands of food and gift items. It is cutting the price of a Magnavox Blu-ray player to $198 from $229, and of the Battleship board game to $10 from $14.38.
“Wal-Mart’s beating the promotional drum as loud as ever and as early as ever in advance of Christmas,” said Bill Dreher, an analyst with Deutsche Bank.
Only a few months ago, retailers thought they were prepared for the economic slowdown. They cut inventories in anticipation of weak back-to-school sales. But to their shock, sales declines reached double-digits in September, only to get worse in October.
The result? Retailers have too much fall merchandise still on their shelves, even as Christmas merchandise is starting to arrive.
“I’ve never seen as many ‘percent off the entire store’ promotions as we’re seeing right now,” said Kimberly Greenberger, a retail analyst at Citigroup who has been studying apparel sales and promotions for a decade.
Retailers that include American Eagle, Ann Taylor, Chico’s, Soma, Gap, Victoria’s Secret, Bath & Body Works, Talbots and J. Jill have offered discounts on their entire merchandise lines or are letting shoppers buy one item and take 50 percent off a second, she said.
“What we’re hearing anecdotally from different retailers is that when they’re putting something on sale at 30 or 40 percent discount it is no longer having an effect on consumers,” Ms. Greenberger said. “They’re having to cut prices 50 to 60 percent to get consumers interested.”
Two stylishly dressed friends spending time in Midtown Manhattan on Thursday said they used to enjoy shopping. “I want to impulse-buy again,” said a wistful Louise Van Veenendaal, an actress. But these days, economic anxiety is prompting the women to steer clear of stores. They refuse even to look at sales circulars.
“I’m much poorer than I’ve ever been,” said her friend, Kate Pistone, also an actress, who makes ends meet by working at a restaurant. Sales there have been declining. “I made $5 last night,” she said.
Analysts who spend time prowling the nation’s stores to track trends say that consumers are simply shell-shocked by all the grim financial news.
“You walk the mall and consumers look like zombies,” said Mr. Morris of Wachovia, after visiting a mall last week. “They’re there in person, but not in spirit.”
While the stores’ price cuts are good news for consumers, they are a dangerous tactic for retailers.
Retailers usually make most of their profit during the Christmas shopping season. And while they always offer impressive sales, they plan to discount only about 25 percent of their merchandise, not half of it, Mr. Cohen said. Too much discounting erodes profits. And by cutting prices so early, retailers risk running out of stock, or color and size options, before the season’s home stretch.
A few retailers have strong balance sheets, but many do not, and with credit hard to find they can ill afford a disastrous Christmas season. Analysts said they expected a new wave of bankruptcies after the first of the year.
Bankrupt and ailing retailers are undercutting some of their healthy peers. Last week, for instance, Mervyn’s announced a 149-store liquidation sale just in time for the holidays. Other such sales are already under way at Steve & Barry’s and Linens ’n Things. Circuit City, the struggling electronics chain, began liquidation sales this week at 155 stores it is closing.
Mr. Cohen of NPD Group said wise retailers would not sacrifice profits just to shove goods out the door. But he acknowledged that in such a panicky climate, the race to discount merchandise had become nearly unstoppable.
“What’s happening is the retailer is almost saying, ‘Please just come in,’ ” he said. “ ‘We’ll pay you to shop.’ ”
