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US economy plummeted as European unemployment mounted

The US economy suffered a massive 6.


2 percent pace of decline at the end of 2008 and the eurozone shed 250,000 jobs in January, data showed Friday, as a fresh effort was launched to bail out Eastern Europe.

The US gross domestic product (GDP) fourth-quarter reading was far worse than the 5.4 percent rate expected by most analysts and underscored the challenges facing President Barack Obama\’s efforts to end the most severe economic crisis since the Great Depression.

“While we now know that the US economy did indeed contract by a massive amount, early 2009 data suggests that the first quarter will also be quite grim,” said economist Dina Cover at TD Bank Financial Group.

“Durable goods orders sank like a stone in January, indicating that capital expenditure by businesses in the US has continued to shrink. This suggests that business confidence is still extremely low.”

Sharpest drop in 27 years

The drop was the sharpest since the first quarter of 1982, the Commerce Department data showed, and came as the world\’s largest economy was winding up a full year of recession.

The official Eurostat state reported meanwhile that the loss of 250,000 jobs in the 16 nations sharing the euro helped drive the eurozone unemployment rate to 8.2 percent, the highest in over two years.

“Persistent, and faster, rising unemployment will weigh down on eurozone consumer spending, especially as it will be liable to lead to slowing wage growth,” warned Howard Archer, chief European economist at IHS Global Insight.

Eastern European aid

With once-booming economies in Central and Eastern Europe particularly hard-hit by the crisis, three international lending bodies announced a massive aid package for the region\’s beleaguered banking sector.

The European Bank for Reconstruction and Development (EBRD), the European Investment Bank and the World Bank pledged to invest 24.5 billion euros (31billion dollars) in the region, the EBRD said.

“Eastern Europe is feeling the full blast of the global economic crisis,” said analysts from Dresdner Kleinwort in a note.

Some countries in the region could become “insolvent,” they warned.

Russia, another formerly vibrant economy, is also struggling as the global slowdown dampens demand for oil and gas, the country\’s principal exports.

And according to the powerful prime minister, the worst is yet to come.

“We are forced to conclude that the crisis is far from over — it has not yet even reached its peak,” Prime Minister Vladimir Putin said in televised remarks.

Meanwhile Denmark and Finland reported falling into recession in the fourth quarter of 2008 and Sweden\’s economy shrank even further.

“We are in the midst of a long, cold and dark winter,” Swedish Finance Minister Anders Borg told reporters in Stockholm.

Governments have mobilized trillions of dollars to counter the crisis, which has its roots in a brutal contraction in the US housing market and the subsequent collapse of bank-held mortgage-backed financial assets.

US to boost Citibank

Further underscoring those woes, the US government said it will boost its stake in Citigroup under a deal aimed at shoring up confidence in the troubled banking giant.

The government\’s stake will be raised to 36 percent from the current eight percent under the plan to convert 25 billion dollars of public capital injected in the form of preferred stock in the bank to ordinary shares, officials said.

The conversion does not call for more government funds but helps shore up the capital position of Citi, once the world\’s biggest financial services firm which has received 45 billion dollars in bailout funds from the government.

The move aims to avoid a feared nationalization of Citi, once the world\’s biggest financial firms, but analysts said the conversion gives the government effective control as the bank\’s largest shareholder.

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