Europe economies dive

Euro zone economies shrank far more than expected in the first quarter, with Germany posting its worst performance since reunification, but in the United States on Friday there were signs of improving consumer sentiment and a stabilising manufacturing sector.

Gross domestic product for the 16 countries using the euro contracted by 2.5 per cent quarter-on-quarter, or by 4.6 per cent year-over-year, the worst on record. Europe's largest economy, Germany, fell by 3.8 percent. The figures added to evidence that despite signs the worst global recession in six decades might be easing, recovery remained elusive.

"It was a massive surprise just how weak the data was," said Paul Mackel, HSBC senior currency strategist.

Central and Eastern Europe face at least another year of economic pain, regional bankers and policymakers said on Friday.

They urged western European institutions to help more.

Ukraine said it needs more funds on top of an existing $16.4 billion IMF bailout.

Economic signals in the United States were more encouraging. US consumers' mood improved in May, as a widely tracked measure of consumer expectations was at its highest level since October 2007.

US industrial output fell at a slowing rate, while machinery orders in Japan also surpassed expectations, both suggesting global industry was at least starting to stabilise.

Energy and financial shares pressured Wall Street, and the Standard & Poor's 500 index closed down 1.1 per cent. Major US indexes were lower for the week, as were European markets, despite a 0.5 per cent gain on Friday.

Industry and consumer confidence surveys have signalled a slowing rate of decline in recent weeks, and central bankers have talked up recovery hopes. Yet signals about consumer demand have been mixed at best.

The world's No. 3 clothing retailer, Sweden's Hennes and Mauritz, raised hopes of a consumer recovery with its first sales increase since July 2008.

But US retailers J.C. Penney and Abercrombie and Fitch suggested consumers remain leery of nonessential spending and are sensitive to prices.

"Price consciousness (is) dictating shopping habits unlike anything I have ever seen," said Abercrombie Chief Executive Mike Jeffries, whose company's loss was wider than expected. US credit card defaults rose to a record high in April, reflecting the millions of job losses since the start of the year. Citigroup, Wells Fargo and American Express Corp. All posted double-digit loss rates.

General Motors Corp. will cut about 1,600 dealers as it struggles to pare down its operations ahead of an anticipated bankruptcy. Bankrupt Chrysler has taken similar measures, part of a shake-up of the US auto industry that has seen sales collapse. Sluggish demand, in turn, has limited companies' pricing power: US consumer prices posted their largest 12-month drop since 1955.

A top US policymaker said the Federal Reserve's aggressive actions had pulled the economy back "from the edge of the abyss," but a return to growth would take time as Americans seek a new balance between consumption and saving.

"I envision a slow recovery. Not a V-shaped snapback - nor even a U-shaped one - but a very slow slog," Dallas Fed President Richard Fisher told the Texas Bankers Association.

Investors appeared more willing to take part in a Fed programme aimed at reviving lending, Fed Chairman Ben Bernanke said on Friday.

Banks, at the epicentre of the financial crisis, still face pressure to raise capital.

Barclays Plc is in talks to sell its prized asset management arm, San Francisco-based Barclays Global Investors, for $10 billion or more. The British bank received "unsolicited interest" after the auction of its iShares unit generated interest in other parts of the business.

Mizuho Financial Group said it would raise up to $8.4 billion in new capital after reporting a third-straight quarterly loss.

International Monetary Fund chief Dominique Strauss-Kahn said recovery - which the IMF predicts is a year away - was dependent on the banking sector.