World economy faces up to deepening sense of uncertainty (Feature)

By Chris Cermak and Andrew McCathie Aug 27, 2010, 17:57 GMT

Washington/Berlin - It was only a few months ago that a debt crisis gripping parts of Europe threatened to derail the global economy's rebound from recession just as the United States was confidently striding along the road to recovery.

How quickly the tables have turned.

Revised growth figures Friday signalled a slowing US economy in the second quarter, while Europe continues to turn in an unexpectedly strong economic performance spearheaded by its largest economy, Germany.

After chalking up big falls earlier this year in the wake of its debt woes, European stocks jumped as much as 4 per cent in the last three months. The euro has climbed more than 10 per cent against the dollar after hitting a four-year low in early June.

By contrast, pessimism in the US has caused Wall Street indices to fall or remain level in the last three months. The Dow Jones Industrial Average on Thursday fell back below the 10,000-point mark for the first time in nearly three months.

'I think we would all agree that, for much of the world, the task of economic recovery and repair remains far from complete,' US Federal Reserve Chairman Ben Bernanke said Friday in a speech to central bankers. He promised the Fed would do 'all that it can to ensure a continuation of the economic recovery.'

Indeed, the talk of a double-dip recession in the US, along with signs that China's fast-paced economic expansion could be losing momentum, have resulted in a deepening sense of uncertainty about the global economic outlook.

At the same time, moves around the world to roll back government anti-recessionary spending programs - a response to skyrocketing budget deficits - are also likely to undercut growth just as politicians face increasing pressure to keep their economies afloat.

For many economists it is not a question of whether the world economy will slow this year, but just how deep the slowdown will be.

Investors returning from their summer vacations are now looking with increasing unease towards the second half of 2010.

The summer data 'did little to alter the picture of a lacklustre recovery that is losing, rather than gaining, momentum,' said Andrew McLaughlin, chief economist with the Royal Bank of Scotland.

The mood is especially sour in the United States. Friday's revised government estimate found that second-quarter gross domestic product grew at an anaemic 1.6 per cent after expanding by 3.7-per-cent in the first three months of 2010.

The US jobless rate remains stuck at 9.5 per cent, down just 0.6 percentage points from a quarter-century high reached in late 2009.

Real unemployment, which includes those who gave up on the job hunt or were forced into part-time work, stands at a hefty 16.5 per cent.

Macroeconomic Advisors, a research group that produces a monthly estimate of US growth, said economic output declined in May and June.

Oscar Jorda and Travis Berge, visiting scholars with the Federal Reserve Bank of San Francisco, wrote this month that 'a recessionary relapse' in the next two years was 'a significant possibility.'

All of this has put tremendous pressure on President Barack Obama, who has struggled to convince the public that he has a handle on the economy. For the first time since he took office, polls this month showed more than 50 per cent disapprove of Obama's presidency.

What is more, data is also pointing to a new European economic divide taking shape.

Booming exports to the world's leading emerging economies have helped German second-quarter economic growth to storm ahead at its fastest pace in two decades, consequently bolstering growth in the 16-member eurozone.

But Greece, which was at the centre of the eurozone debt crisis, sunk deeper into recession during the three months ended June. Unemployment in Spain has climbed to about 20 per cent.

Moreover, analysts expect foreign demand to tapper off in the coming months.

'The eurozone's relative resilience has prompted some optimism lately, but the region's business cycle typically lags behind that of the US,' said Jennifer McKeown, senior European economist with the research group Capital Economics. 'Eurozone growth will almost certainly follow that in the US down very soon.'

Add to that doubts about Asia's economic prospects, and the risks for global growth start to mount.

A surprise dip in Japanese unemployment offered some hope for sluggish consumer spending. But speculation is growing that the Bank of Japan might try to bolster exports by stemming the rise of the yen, which is hovering close to a 15-year high against the dollar.

Even China, which has been leading the world out of recession and this month overtook Japan as the world's second largest economy, has been showing signs of cooling as policymakers look to avoid creating the kinds of asset bubbles that led the wealthy world into crisis.