Gloomy report triggers shares rout

The latest slump was triggered by a gloomy report from economists at investment bank Morgan Stanley, which slashed its forecasts for global growth.

But eurozone debt fears, poor economic data in the US, and fears over China raising interest rates and limiting its demand, all played their part in the day’s rout.

The FTSE 100 Index recorded its biggest fall since November 6, 2008 and lost almost all the gains made in the recent four-day rally.

The banking sector was hammered by concerns over the eurozone debt crisis - triggered earlier this week by the Paris meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel.

Traders were disappointed by the lack of direction offered by the European leaders – who failed to back proposals to roll out eurozone bonds to fix the region’s debt problems and also raised the prospect of a so-called Tobin tax, a levy on City trading.

Elsewhere, the European Central Bank made a loan of $500m for a week to an unnamed bank in the first use of this emergency facility in more than a year.

RBS stood 11% lower at 22.3p – less than half the 50p-per-share price the Government paid for its 81% stake in the bank – and Lloyds dropped 9% to 29.8p, compared with the 63p paid for by the Government for its 41% stake. Barclays also lost 11% of its value.

Morgan Stanley downgraded its forecast for global economic growth to 3.9% from 4.2% in 2011 and to 3.8% from 4.5% in 2012.

The bank also slashed its 2012 forecast for the UK to 1.4% from 1.8% as a result of the slowdown in global growth and the weak performance in the US and EU economies. The UK forecast for 2011 was held at 1.2%.

Morgan Stanley analyst Joachim Fels said growth in emerging markets, which drive global growth, is not expected to be as aggressive as previously thought.

He said: “The main reasons for our growth downgrade, apart from disappointing incoming data, are recent policy errors in the US and Europe plus the prospect of further fiscal tightening there in 2012.

“This is eroding business and consumer confidence and has weighed down on financial markets.”

In the US, the Dow followed European markets deep into the red after a Labor Department report revealed a 400,000 strong surge in unemployment benefit claims last week and US inflation rose.

Elsewhere, an August manufacturing survey, the Philadelphia Fed Index, registered its biggest fall since October 2008 and existing homes sales data remained weak.

The flight from risk saw traders plough into the safe haven investments of gold, which was up at 1,812.5 US dollars an ounce, and the US dollar itself, which was up against the pound and euro.

Kathleen Brooks, research director at Forex.com, said: “This could weigh on markets for some time as there appears to be no immediate solution to the eurozone debt crisis and there are growing signs that the UK, US and Europe are on the cusp of recession.”

Commodity prices suffered, with Brent crude oil in London down nearly 3% to 107.3 US dollars a barrel.

The weak session in the UK, spurred on by poor retail sales figures for July, followed a mediocre session on Asian and US markets.

Retail sales volumes in the UK grew by a lacklustre 0.2% in July, compared with 0.8% growth in June, which came after yesterday’s bleak sales outlook from computer maker Dell.

Germany saw shockingly low growth of 0.1% in the second quarter while France’s GDP output was flat in the period.

The UK reported a sluggish 0.2% growth rate between April and June and the US was shaken by an unexpectedly low growth of 1.3% at an annualised rate in the same period.

Meanwhile, in Europe, the cost of borrowing for governments such as Italy and Spain has risen, signifying a lack of confidence in the countries’ public finances.