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GLOBAL ECONOMY-A new quarter’s dark clouds and silver linings

by on September 30, 2012 7:00 pm GMT
 

Sun Sep 30, 2012 3:00pm EDT

* Data to show brisk headwinds but some signs of hope

* Fiscal cliff fears may show up in business surveys

* Main central banks likely to stay on hold this week

By Alan Wheatley, Global Economics Correspondent

LONDON, Sept 30 (Reuters) – The darkest hour is just before
dawn, the old saying goes. Of course, that’s also when your
house is most likely to get burgled.

The same mix of new hopes and old fears defines the global
economy heading into the fourth quarter.

Those who glimpse a bright day breaking are looking past a
grim flow of data to a stronger 2013. The U.S. housing recovery
is well entrenched, stock markets have had a good three months
and both the Federal Reserve and the European Central Bank have
ripped up the rule books to prop up their economies.

But those alert to lurking dangers retort that unprecedented
central bank activism is impotent when the world is in a
liquidity trap; households and governments will be paying down
excess debt for years to come.

A raft of business surveys in Europe and America, leading up
to the monthly U.S. employment report on Friday, is likely to
provide grist for both mills.

Julian Callow, chief European economist for Barclays Capital
in London, said central banks were addressing a significant
number of tail risks, but other threats lingered.

“It’s not a climate in which we can feel especially gung-ho
about the economic recovery,” he said.

According to 80 economists polled by Reuters, non-farm jobs
probably rose by 115,000 in September, barely more than the
tepid 96,000 figure in August that prompted the Fed to launch a
third round of asset purchases to bring down bond yields.

But a strike by Chicago teachers will have depressed the
headline number. Stripping it out, the private sector is
forecast to have added 130,000 workers, up from 103,000 in
August. Not great, but heading in the right direction.

A pair of surveys by the U.S. Institute of Supply Management
is likely to paint a similarly blurred picture. Economists
expect a small pick-up in manufacturing to be offset by a dip in
services.

The reports will be scrutinised especially closely this
month for signs that businesses are growing nervous about a huge
package of spending cuts and tax increases that will take effect
automatically in January unless politicians agree how to cut the
budget deficit by $1.2 trillion over 10 years.

“Uncertainty about U.S. fiscal policy is the single biggest
near-term threat to the global recovery,” Fitch Ratings said.

Bank of America Merrill Lynch added that the ‘fiscal cliff’
was the No. 1 concern of its investors. Some economists think a
lack of clarity over the outcome is already being reflected in
weak orders for durable goods. The tightening would be equal to
4 percent of annual output.

Yet J.P. Morgan said 52 percent of the corporate clients it
surveyed globally replied that the issue was making no
difference to their investment plans; none reported a
‘significant impact’.

CENTRAL BANKS TO SIT ON THEIR HANDS

Europe is no more clear-cut.

Final September surveys of purchasing managers are likely to
confirm the euro zone is mired in recession.

But Berenberg Bank said that, thanks to the ECB, the
17-nation bloc was close to an inflection point; rebounding
growth in narrow money pointed to renewed growth by spring at
the latest.

Similarly, Deutsche Bank expects the euro zone economy to
bottom out before the end of 2012 as the credit crunch eases. By
this time next year, output could be expanding at a 1 percent
pace.

“But with a poor economic outlook and still considerable
political uncertainty, we see a high risk of a return to serious
tensions in EMU (economic and monetary union) in the coming
months,” the bank’s economists said in a report.

After a dramatic pledge last month to buy the bonds of
struggling euro zone members that agree to tough reforms, the
ECB is expected to hold steady when its policy council meets on
Thursday, according to economists polled by Reuters.

They also expect no change this week from the Bank of
England, although both central banks are likely to ease further
by year’s end.

In Australia, too, money markets are pricing in a rate cut,
but economists think the central bank, which meets on Tuesday,
will wait a while to pull the trigger.

The same goes for the Bank of Japan. Fresh from unexpectedly
topping up its asset-buying and loan programme on Sept. 19, the
BOJ is likely to hold off for now on further easing at a policy
meeting that ends on Friday.

Ultimately, optimists say, determined central banks will
prevail. Flooding their economies with cheap money will revive
risk-taking and investment, generating demand and jobs.

But if, as British economist Andrew Smithers contends,
monetary policy is “useless” under current conditions, the
outlook is bleak.

For then only fiscal policy can engineer a recovery, yet the
United States, Japan and Britain are no longer able to add to
their deficits, while Germany and China do not want to, he said.

“The world may muddle through, but the chances of a serious
and prolonged recession are exceptionally high,” Smithers, head
of an eponymous London consultancy, concluded in a report.