Another week, another shrinking economy. This time it was the turn of the US which contracted for the first time in seven years. The Fed reacted with its second 50bps rate cut in a month. Interest rates also fell across Asia and currency markets reacted sharply as the IMF provided emergency funding to a number of emerging markets.

In the UK, few will be celebrating the first anniversary of declining house prices. According to Nationwide, home values have fallen for twelve months on the trot and the cost of a typical house is c15% lower than this time last year. Prices are now back to the levels prevailing in February 2006. Mortgage lending fell to its slowest pace for more than a decade in September, but leading indicators suggest the market might be finding a floor, albeit at historically low levels (mortgage approvals rose 1k to 33k in September). Falling house prices have helped push consumer confidence to an all time low. The GfK/NOP consumer confidence survey showed UK households are less confident about major purchases than at any time since the survey began in 1982. This was reflected in the latest Bank of England data. Unsecured loans, typically used to buy 'big ticket' items, were repaid in Q3. Against this backdrop, we expect the Bank of England to cut rates by 50bps when it meets later this week.

In the US, figures for economic growth (or the lack of it) added to the gloom. The US economy contracted by 0.3% q/q (annualised) in Q3 - the first decline since 2001. International trade again softened the blow - without the boost from net exports the economy would have contracted by almost 1.5%. But trade was not enough to offset demand destruction at home - domestic retail sales fell 1.8%. Consumers are clearly finding it tough. Spending is slowing, stockmarkets are down c40% in the past twelve months, income growth is easing as the labour market weakens and house prices continue to fall. In August, the decline in the 20-city Case-Shiller home price index accelerated slightly, to -1% m/m following July's -0.9% m/m. On this measure prices are now 20% below their 2006 peak. With financial market turmoil intensifying in September/October, further price falls are likely - the futures markets point to home prices eventually bottoming out c35% below their 2006 highs.

Against this backdrop, it was no surprise that US consumer confidence fell to its lowest level in the 41 year history of the Conference Board's survey. With all this gloom in the mix, the Fed delivered its second shot in the arm for October, cutting rates by a further 50bps to 1% - a level last seen during the 2002/03 downturn. Growth is likely to slow further from here before recovering in 2010.

Confidence is also plunging across the Eurozone. The European Commission's survey of business and consumer confidence recorded its largest ever monthly fall (it started in 1985) to reach a 15 year low. The expectations index of the German IFO, a good leading indicator of economic activity, also dropped to a new record low. It suggests that the region's largest economy, and world's biggest exporter, is suffering particularly badly from the slowing global economy. If there was any good news last week, it came from on the inflation front, with Eurozone CPI falling to a ten month low of 3.2% in October. This will provide welcome breathing space for the ECB which is expected to cut rates by 50bps (to 3.25%) at this week's meeting.

In Asia, the slowdown continues. Japanese industrial production fell again in Q3 and leading indicators suggest further declines ahead. With activity slowing rapidly around the region, rates were trimmed in Japan, China, Hong Kong, Korea and Taiwan. Japan's cut, the first in seven years, was triggered by concerns about the stronger yen on exporters. The Japanese currency briefly traded at ¥92 to the dollar - its highest level since 1995.

Foreign exchange markets had a particularly turbulent week. The dollar reached two and six year highs against the euro and sterling as expectations of large rate cuts were fuelled by central bankers' comments. Hungary's forint was particularly volatile - it fell 5% on Tuesday before rallying towards the end of the week. The rally followed the announcement of the largest country bailout to date, in which the EU, World Bank and IMF pledged $25bn. The IMF also assisted the Ukraine ($17bn), Pakistan ($9bn) and Iceland ($2bn).

Commodities provide a glimmer of hope. Lower commodity prices will help bring inflation down and stimulate demand in the coming months (oil traded in the $60-$65 range last week). To put this in perspective, each one cent decline in US gas prices is worth $1bn to US consumers - gas prices have fallen $1.50 from the peak - effectively providing an annual boost of $150bn. That is the same value as the Government cheques sent to households in Q2 or around 1.5% of household disposable income.