U.S. outlook casts shadow over world economy - Reuters poll

BANGALORE Tue Aug 9, 2011 6:58pm BST

A man reflects in a window as he passes near clocks at the Warsaw Stock Exchange August 9, 2011. REUTERS/Kacper Pempel

A man reflects in a window as he passes near clocks at the Warsaw Stock Exchange August 9, 2011.

Credit: Reuters/Kacper Pempel

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BANGALORE (Reuters) - The chances of another U.S. recession are rising and Europe's recovery is also at risk, according to the latest Reuters poll, taken during the worst stock market selloff since the nadir of the financial crisis.

The latest survey of more than 200 economists, published four years to the day that credit markets first started to dry up, showed analysts cutting forecasts for U.S. growth, a reflection of widespread concern the global economy is slowing rapidly.

Punishing losses in world financial markets, culminating in widespread carnage in risky assets this week following Standard & Poor's downgrade of U.S. sovereign debt, suggest sentiment has soured -- and decisively.

"The world doesn't look particularly rosy at the moment. There's no question about that," said Mark Miller, senior international economist at Lloyds Banking Group.

"The equity market reaction over the last few days is a particular concern. It doesn't point towards a strong pickup in investment activity, which is needed in many countries."

World stocks, as measured by the MSCI, crashed into a bear market on Tuesday, falling 20 percent since May after days of punishing losses that have wiped away trillions of dollars in company equity around the globe.

While economists are still clinging to hopes for better days, the consensus for 2.3 annualised U.S. growth in the current quarter -- slashed from 3.1 percent -- will not be enough to turn around the moribund labour market.

The forecasts come just hours before the U.S. Federal Reserve -- now expected to hold rates near zero through this year and next -- meets to set policy.

But investors and market speculators hoping for a third round of bond purchases, or quantitative easing (QE3), after $2.3 trillion (1.41 trillion pounds) already doled out, may be disappointed.

The poll found there is only a 30 percent chance that will happen, even though the probability that the world's largest economy sinks into a second recession has risen to one-in-four, from one-in-five just a month ago.

Seven of 40 economists now see at least a 50 percent chance of more QE, compared with just one of 46 in a poll taken two months ago.

Earlier on Tuesday, China reported industrial output growth, the engine of the world's second-largest economy, slowed in July while inflation unexpectedly shot up, a reminder that all is not well in Asia either.

Prospects for Europe are darkening too, even though Germany, the continent's largest economy, has remained a bulwark of economic and fiscal strength through the recovery.

But economists seem even more reluctant to acknowledge that a sovereign debt crisis that started in Athens, spread to Dublin and Lisbon and is now circling Madrid and threatening Rome, will do much more than delay a broader euro zone recovery.

While the latest euro zone purchasing managers' indexes suggest the recovery, led by France and Germany, is grinding to a halt, the Reuters consensus merely slipped to 0.3 percent growth from 0.4 percent for the current quarter.

And while a majority of euro zone money market traders polled by Reuters on Monday said it was a bad idea for the European Central Bank to begin raising interest rates in April, economists still see one more hike, to 1.75 percent, this year.

For Britain, where the capital's police cells are full and other cities across the country are reeling from the worst riots in decades, the economic outlook is also turning down, particularly for 2012, when London hosts the Olympic games.

That is also when the government's planned dramatic spending cuts, to plug a huge hole in the budget thanks to British bank bailouts and the deepest recession since World War Two, will be in full swing.

Economists still see 0.5 percent growth in the current quarter, following a nine-month period of essentially no growth. But economists have pushed back the timing of the first rate hike by one quarter for the fourth straight month.

The first move up in the Bank Rate, which the Bank of England has held at a more than 300-year low of 0.5 percent since early 2009, is not expected until the second quarter of next year.

The chances of a second round of QE in Britain rose to 30 percent this month, from 25 percent a few weeks ago and 20 percent about a month ago. The BoE completed the first 200 billion pounds of purchases early last year.

"It is looking ever more likely that a further round of QE will take place," said Rob Harbron at CEBR, an independent forecasting company.

Japan, still reeling from its worst natural disaster since World War Two and a persisting nuclear crisis, is set to emerge from recession in the current quarter.

Economists have generally been more optimistic on Japan's prospects because of an expected reconstruction boost.

But a strong yen -- which due to its safe-haven status is now trading close to a post-war high against the dollar set in March, despite intervention by the Japanese authorities -- is likely to hamper its export-reliant economy.

(Polling and analysis by the Bangalore Polling Unit, Jason Lange in Washington, Kaori Kaneko in Tokyo, Andy Bruce and Jonathan Cable in London; Writing by Ross Finley; Editing by Susan Fenton)

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