World economy to gear down, recession risk low - polls

LONDON Wed Jul 14, 2010 4:02pm BST

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LONDON (Reuters) - The world economy will cool a bit in the next few months as powerhouses China and the United States gear down and governments attempt to dam rivers of red ink, Reuters polls of over 600 economists showed on Wednesday.

Yet several Asian economies, like India's and South Korea's, are expected to perform better this year than thought just a few months ago, underscoring how uneven the global recovery has become from a historic financial crisis and deep recession.

Reuters polls conducted around the world over the past several days show hatchets taken to growth forecasts for the U.S. in the coming quarters and no Federal Reserve interest rate rise until next year.

But looking further out, economists remain optimistic about world growth prospects. They expect decent global GDP growth of 4.2 percent this year and 4.0 percent in 2011, slightly faster than the last poll taken three months ago.

There is also a consensus view among analysts that the quarter just ended was stronger than many had been forecasting earlier in the year, meaning an impending slowdown in the second half could pinch, even if things brighten again in 2011.

"Globally, things are slowing, but ... deceleration is coming from what look like stronger levels of Q2 growth than many expected," said Dominic Wilson, director of global macro and markets research at Goldman Sachs in New York.

"The toughest issue is how much to rely on better-than- expected growth outside the U.S.," he said.

The findings come just as the U.S. company earnings reporting season kicks into gear, where expectations are high on the cusp of a week-long recovery rally in stock markets from depths dug last month on worries the global economy is slowing.

JOBS AND RED INK

The likelihood of a growth slowdown, along with benign inflation, means that major central banks that still have rates held at rock-bottom, like the U.S. Federal Reserve and the European Central Bank, will keep them there well into next year.

But many of those that have raised interest rates recently -- like central banks in Korea, India, Canada, Sweden and New Zealand -- are likely to raise rates again this year, perhaps several more times in some cases.

In China, the world's third largest economy, growth is expected to cool gradually as the government takes away stimulus it provided during the financial crisis. But its economy will still grow 10 percent this year and 9 percent in 2011. India is also expected to expand rapidly.

But there have been clear signs global growth is slowing, particularly in the latest round of purchasing managers' indices of private sector companies in both manufacturing and services.

High unemployment remains one of the gravest risks to recovery across the developed world, pressuring household budgets already reeling from the financial crisis and now facing impending tax increases from cash-strapped governments.

"It is going to require a lot more growth to start to move the economy forward on a basis that feels acceptable," said Jonathan Basile, economist at Credit Suisse.

The U.S. economy shed jobs in June for the first time since last year and there is little hope that the jobless rate will fall much from 9.7 percent currently unless growth picks up.

The consensus shows the U.S. jobless rate averaging at or above 9 percent until near the end of 2011.

Unemployment is expected to linger near 10 percent as well in the euro zone, where many governments have embarked on budget cutbacks that will pressure the labour market if the private sector is not strong enough to pick up the slack.

The greatest fiscal worries remain concentrated in the euro area, where the single currency was hammered earlier in the year on concerns Greece's fiscal woes would spread to other smaller economies that also use the euro.

But for now, most economists are not sounding the alarm bells, bracing for lacklustre growth at worst.

"With decent economic growth in the core countries -- mainly Germany -- a double-dip recession remains a risk and not a base scenario," said Juergen Michels, European economist at Citi.

The poll found a median one in five chance of a double-dip scenario materialising in both the euro zone and Britain.

(Polling by the Reuters Polling Unit led by Yati Himatsingka in Bangalore; Additional polling and reporting by Chris Reese in New York, Kaori Kaneko in Tokyo, Andy Bruce and Jonathan Cable in London, Vicky Buffery in Paris, Gavin Jones in Rome, Cirsten Pahlke, Paul Carrel and Brian Rohan in Berlin, Jennifer Kwan in Toronto, Nopporn Wong-Anan in Singapore, Wayne Cole in Sydney, Alan Wheatley in Beijing, Anurag Joshi in Mumbai, Cheon Jong-woo in Seoul; Editing by Stephen Nisbet)

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