Light at end of tunnel or false dawn?

By Emily Kaiser

WASHINGTON (Reuters) - The world economy may be in for a painful reality check this week, should a heavy slate of housing-related data point to more mortgage malaise.

In the aftermath of the U.S. Federal Reserve-orchestrated rescue of investment bank Bear Stearns and deep interest rate cuts, some analysts have begun to speculate that the worst may soon be over for battered global financial markets.

They point to encouraging news in the form of stronger-than-expected earnings from Wall Street bellwethers, including Goldman Sachs and Morgan Stanley, some easing of pressures in credit markets, and a well-received initial public offering from credit card giant Visa.

Yet the sense of panic was still palpable last week as stocks tumbled on the faintest rumour that another bank could be poised to announce more write-downs of bad debt.

"Psychology has now overwhelmed economics," Alan Blinder, economics professor at Princeton University and a former Fed vice chairman, wrote in an editorial in the Washington Post.

So far, U.S. economic data has shown deterioration in the manufacturing sector, a sagging job market and a decline in consumer spending -- three worrisome signs that a recession may have begun.

However, not all the news has been gloomy, with exports in particular providing much-needed support. While the rest of the world economy has cooled somewhat, fears of a U.S.-led global recession have yet to materialize. Indeed, the Organization for Economic Cooperation and Development said on Thursday that euro-zone growth would continue.

"The sky's not falling in," Jorgen Elmeskov, the OECD's chief economist, said in a Reuters interview.