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U.S. leading G7 recovery

Source: Reuters - Fri 18th Sep 2009

A rich-nations recovery from the deepest recession since the 1930s is taking hold, although the latest Reuters economic outlook also shows tame inflation expectations and no rush by policy makers to hike interest rates.

Monthly surveys of around 200 economists across the United States and Europe show upward revisions to growth forecasts for the current quarter and an overall better outlook for the euro area and Britain than thought last month.

But the Reuters consensus for U.S. recovery, already relatively strong compared with Europe given that the U.S. was the first to lead the downturn and always expected to be the first to come out, has not strengthened much running into 2010.

What has changed is confidence in the recovery's durability. The median probability of a double-dip recession in the U.S., with the economy slipping back into the red after a move higher, has narrowed to just one in five from one in four last month.

This coincides with yet more stock market gains since the last poll and the clearest pronouncement yet from Federal Reserve Chairman Ben Bernanke on recovery prospects, saying on Tuesday that the U.S. recession "is very likely over".

But economists are reluctant yet to pencil in anything aggressive in the way of interest rate hikes even as debate rages over when central banks will shut off some of the incredibly accommodative policies currently in place.

"Despite growing conviction among investors and analysts that one of the worst recessions in modern times is ending, questions about the strength and durability of economic recovery loom large" noted Robert DiClemente at Citi in New York.

That remains a big concern in Japan, where a new government faces the prospect of the recent rebound in quarterly growth tapering off while the economy experiences deflation this fiscal year and next. 


Many in financial markets are worried that the trillions of dollars worth of central bank and government stimulus pumped into the system - some of which has found its way into stock markets, sending them up 50 percent or more since March - will eventually trigger an upward spiral in consumer prices.

Ten-year euro zone breakeven rates have risen to their highest in a year, which coincided with gold hitting an 18-month high above $1,000 an ounce. Storm clouds are gathering over the U.S. dollar and government bond yield curves are steepening.

Yet economists as a group don't seem so convinced about the inflation threat. Apart from the UK, where inflation remains surprisingly sticky compared with other rich nations, there have been few signs of inflation picking up.

Forecasts for inflation this year and next remain remarkably tame, particularly for Japan, which is seen deflating. There was little change overall compared with last month's poll.

Consumer spending, which makes up the largest part of gross domestic product, is likely to remain subdued in the coming months, particularly given that unemployment is still rising.

"Against this backdrop, the near-term inflation outlook remains very well grounded and there are greater risks that disinflation tendencies could still surprise" said DiClemente.

The Reuters consensus for where U.S. unemployment will peak rose slightly to 10.1 percent, from 10.0 percent, in the first half of next year. It's currently at 9.7 percent, the highest in more than a quarter century.

But that compares with a peak of 8.8 percent forecast in Q2 2010 predicted in a poll at the start of this year. Since then the rate of non-farm payroll job losses has slowed but nearly 4 million jobs have gone since the start of the year. 

In the euro area, joblessness is expected to peak at 10.8 percent, the same level predicted last month.

Interest rates, which central banks tend not to raise while unemployment is still climbing, look set to remain steady well into the second half of next year. Tame inflation, at least for the moment, will allow policymakers to remain cautious.

"The degree of uncertainty is still high. Withdrawal of the fiscal and monetary stimulus in the euro zone and worldwide could significantly postpone a strong recovery" said Paulo Carvalho at Banco BPI.

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