WASHINGTON: An improvement in manufacturing, employment and retail sales data in the United States, and mounting signs that Europe will agree on a rescue plan large enough to contain the Greek debt crisis, have lifted some of the gloom overhanging the global economy.
But the gains are highly tentative and policy mistakes in Brussels this week could easily upend the outlook.
Over the past three months, political gridlock in Washington over the U.S. budget deficit and infighting in European capitals resulted in the biggest falls in the prices of risk assets since the collapse of Lehman Brothers in late 2008.
Global stock prices have since stabilized, and in Europe even posted gains over the past week, easing fears that the developed world would drive the global economy off a cliff.
"Despite the dark policy backdrop, not all is bad," said Joachim Fels, head of global economics at Morgan Stanley.
Energy and commodity prices also have fallen sharply, boosting spending power, particularly in the United States where crude oil has tumbled 14 percent since July.
The relaunch of unusual liquidity measures by the Federal Reserve, European Central Bank, and Bank of England has alleviated strains in bank funding and calmed markets, buying politicians some extra time to sort out their fiscal woes.
"Things are looking a little bit brighter out there, but there are still enormous out-sized risks," said Nigel Gault, US chief economist for IHS Global Insight.
Prime among them is Europe. If European Union leaders fail at their summit next weekend to deliver a comprehensive plan to resolve its sovereign debt crisis and recapitalize its banks, market volatility will return with avengence, analysts warn. [ID:nL6E7HL0JK]
Even the extraordinary steps that central banks have taken to prevent the crisis worsening have brought large risks.
Global liquidity, as measured by foreign exchange reserves and central bank balance sheets, has soared to $18.3 trillion, equal to 30 percent of global GDP, from $10.4 trillion three years ago, Bank of America/Merril Lynch has estimated. This massive monetary policy easing has stirred inflationary fears.
There is only one solution. "Better policy decisions on both sides of the Atlantic are needed to get us out of this fix," said Fels.
Otherwise the negative feedback loop will resume, where bad policy decisions intensify risk aversion and worsen the sovereign debt crisis by destabilizing financial markets, undermining bank solvency, and upending world economic growth.
U.S AND CHINA
In the United States, there are few signals that lawmakers have the appetite for a medium-term resolution to the budget deficit before November 2012 elections.
The U.S. Senate this week rejected President Barack Obama's $447 billion jobs package after disagreement over how to fund the minor stimulus measure, with two Democrats facing tough re-election joining Republicans.
Senators next week week may agree to vote on some piecemeal jobs measures such as extending jobless benefits and cutting payroll taxes.
Joel Prakken, economist at Macroeconomic Advisers in St. Louis, calculates that extending unemployment benefits for the long-term jobless would add 0.25 percent to real GDP growth in 2012, and support 200,000 jobs. Continuing the payroll tax holiday for employees would add 0.50 percent to GDP over the year and raise employment by 600,000, he said.
"It is modest at best," Prakken said.
But combined with recent improvements in auto sales, retail sales in August and September, and better manufacturing and employment reports, the U.S. economy looks on more solid footing than a few months ago, he said.
That would be good news for China, which relies heavily on its exports to the United States and where economic growth is clearly slowing. The question is by how much.
Figures on Tuesday are expected to show China's third-quarter GDP up 9.2 percent from a year earlier, according to a Reuters poll of economists. That would be down only modestly from the second quarter, when China recorded 9.5 percent growth.
A less closely watched indicator, urban investment, may provide a better signal. Last week's disappointing trade figures underscored China's vulnerability to a global slowdown. Domestic growth has cushioned the blow so far, and investment is a big reason why.
The data on Tuesday is expected to show urban investment up 24.8 percent from a year earlier, only slightly below the second quarter's 25 percent rise. If external demand weakens dramatically, economists think China will compensate by ramping up investment, which accounts for the bulk of its GDP. ' Reuters