G7 recovery at hand but durability in doubt

 

The world's developed nations may now be creeping out of the worst recession in decades but the outlook remains brittle and interest rates will remain steady well into next year, Reuters polls of over 250 economists show.

Investors and traders have been mostly exuberant since early March after digging a multi-year pit for world stock markets, lifting some major share indexes by 50 percent on hopes that the worst is over and that growth will soon return.

That has stirred plenty of speculation about eventual exit strategies from record-low interest rates and unusual measures policymakers have drawn up to get the developed world out of its worst economic funk since the Second World War.

The August Reuters poll saw one of the largest upgrades to the near-term outlook seen so far this year in the U.S.

But many forecasters, perhaps chastened by how they collectively misjudged the severity of contraction late last year and in the early months of 2009, remain remarkably subdued about next year.

"Reports of the death of the global economy were greatly exaggerated, but we should not already be looking for a clean bill of health" said Marco Annunziata, chief economist at UniCredit. "Recent data justify relief, not euphoria."

Many are warning not to draw too many hard conclusions over unexpected news that the euro area's two largest economies, Germany and France, grew in the second quarter, as did the world's second largest economy, Japan.

Bundesbank chief Axel Weber sounded the same tone in an interview this week, warning the German recovery may not be sustainable yet. And Bank of Japan board member Atsushi Mizuno said on Thursday that global economic conditions were fragile. 

The Reuters consensus for growth in the last quarter of this year for the U.S., euro area and Britain was revised up from the July poll, with the 2010 GDP outlook also revised up for Japan, euro zone and the UK.

DOUBLE-DIP?

The poll found a median one in four probability in the United States of a "double-dip" recession - one where a return to growth is followed again by another period of contraction.

They also predicted a peak of 10 percent in the jobless rate, compared with 9.4 percent currently, suggesting hopes the pace of layoffs will taper off dramatically in future months may be premature. Last month, the consensus was that unemployment would peak at 10.2 percent.

That said, the range of possibilities for GDP given in the latest polls narrowed once more, suggesting a greater degree of confidence that a recovery will take hold, if not at the speed financial markets are currently anticipating.

The inflation outlook remained muted across all regions polled, leaving central bankers with plenty of room to leave interest rates at record lows well into next year, and in Japan, well into 2011.

Even for Britain, where inflation has not plunged as it has done in the rest of the Group of Seven industrialised nations, the inflation outlook is tame.

"We see inflation remaining below target over the next 18 months and see no reason for the Bank of England to start to tighten monetary policy until mid-2010 at the earliest" said John Hawksworth at Pricewaterhouse Coopers.