Rich world economy prospects darken as US slows

LONDON: The rich-world’s economic prospects darkened over the last month, a Reuters poll of economists showed, with new signs of a slowdown in the United States compounding already stern fears about the poor fiscal health of Western economies.

Since last month’s regular survey of analysts in May, recent events have only underlined the increasingly disjointed nature of the global economic recovery.

While China and India took new steps to calm fervent and inflationary economic expansions, Western powers have been preoccupied with attempts to defuse fiscal time-bombs in Greece and possibly the United States against a backdrop of tepid growth.

Economists in Wednesday’s poll took an axe to the outlook for US economic growth following a raft of dire jobs and industrial data this month, while keeping their long-held view for weak euro zone and UK growth until the end of next year.

Only the Japan saw an upgraded outlook in the latest poll thanks to reconstruction efforts that have gained pace since the March 11 earthquake and tsunami.

“Two key downside risks have increased over the past few months -- the risk of a disruptive default in Greece and of a significant slowdown in the US,” said Kurt Karl, chief US economist at Swiss Re in New York, in a research note.

He expressed hope the US slowdown may be nearing an end, since oil prices are no longer rising and the supply bottlenecks caused by the Japanese disasters should be resolved later in the year.

Still, financial markets have already reacted to the slowdown taking place. World stock indexes have shed much of the gains made since the start of the year, while US Treasury bond yields have fallen.

The consensus forecast for US second-quarter gross domestic product was slashed to an annualised 2.5 per cent from 3.3 per cent in last month’s poll, following a weak 1.8 per cent rate of growth recorded in the first quarter.



Such a rate of expansion would still place the US top among its euro zone, UK and Japanese peers, but well behind major emerging market powers that themselves are showing signs of slowing growth.



India and China saw accelerating inflation in May, according to data on Tuesday, prompting the Beijing to lift bank reserve requirements and putting pressure on India to hike interest rates further.



Rates of growth and inflation have been far greater in these developing powers, but the dilemma of keeping inflation in check without sacrificing growth has preoccupied policymakers everywhere.



The latest batch of Reuters surveys showed inflation pressures are still on the rise in the West too -- with CPI forecasts in the US and especially Britain being bumped up.



Indeed, over the course of this year, inflation estimates in the US, UK and euro zone for Q2, Q3 and Q4 2011 have doubled -- and in some cases more than doubled -- owing to the surge in crude and commodity prices.



Perhaps reflecting expectations for higher inflation in the US, the poll showed only a median 15 per cent chance the Federal Reserve will embark of a third round of money supply-boosting quantitative easing.



RATE EXPECTATIONS



Unlike in major emerging powers, which have managed a sustained and forthright policy of tightening interest rates to counter high inflation, Western central banks have shown no such coordination.



A Reuters poll on Wednesday showed the People’s Bank of China will yet take more measures to curb price pressures, currently at three-year highs.



In the West, only the European Central Bank has so far acted against above target inflation among the four biggest central banks -- also including the Fed, Bank of England and Bank of Japan -- after raising interest rates from a record low 1.0 per cent in April.



But pressure is mounting on the Fed and BoE to follow suit.



“A significant pick-up in inflation, with sluggish growth, will leave Fed policy in a bind,” said Stephen Lewis, economist at Monument Securities in London.



“By Q2 2012, the Fed’s credibility is likely to be under so much strain that it will start the process of normalising interest rates.”



Indeed, a survey published earlier this month suggested high inflation has already dealt a heavy blow to the BoE’s credibility since the start of the year. Inflation there hit 4.5 per cent in May, far beyond the BoE’s 2 per cent target.



UK economic growth, in common with the neighbouring euro zone, is not expected to exceed 0.5 per cent in any quarter from now until the end of next year.



While France and Germany have led the recovery among the euro area’s 17 nations, debt-laden strugglers like Greece, Spain and Portugal have dragged badly on growth.



Even so, the bloc looks like it will avoid a direct hit from the festering sovereign debt crisis that has enveloped Greece.



Even before the March 11 earthquake and tsunami off Japan’s east coast, the world’s third largest economy was struggling to generate meaningful growth. But economists upgraded the outlook for Japan’s recovery for the third successive month.



“The recovery will gather pace in July-September and the economy is expected to achieve a V-shaped recovery,” said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting.



While poll respondents expect the Japanese economy to contract 0.7 per cent in the second quarter, they see it rebounding 1.0 per cent in the third.