Light at end of tunnel or false dawn?

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 US 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, US 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 US-led global recession have yet to materialise. Indeed, the Organisation for Economic Cooperation and Development said on Thursday that eurozone growth would continue.

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

This week, a close inspection of the US housing sector may reveal that deep cracks in the economic foundation have yet to be repaired. The financial market turmoil now in its eighth month has its roots in failing mortgages, so until the housing sector is stabilised there is little hope for sustainable economic recovery. Not only has the slumping housing market hurt the US economy, but because American mortgages were repackaged into complex securities sold all over the world it is also the primary cause of global financial stress.

While no one is expecting this week's reports to show a US recovery under way, economists will be looking for evidence that the pace of the decline is slowing.