Richest nations set for better growth

The world's richest nations are set for better growth this year than thought just a few months ago, although economists polled by Reuters are betting interest rates will remain at record lows well into the year.

The consensus view among over 300 economists across North America, Europe and Japan is that unemployment rates also may peak lower than previously thought in 2010 after emerging from the worst recession on record since the World War II.

Predictions for recovery have been steadily improving since early last year, coinciding with an explosive stock market rally since March that has a key index of world stocks up over 75 per cent on expectations of a global economic rebound.

But economists, many at banks which have been profiting from record low interest rates and emergency funding programmes that rescued the financial sector from the worst crisis in 80 years, seem reluctant to ramp up their policy rate forecasts.

The recovery they are predicting is much stronger than what was feared at the depths of the financial crisis but still doesn't measure up to the strength of previous rebounds.

Markets may also be set for a pause or a pullback given that at least in the US, which is leading growth among rich nations, the fourth quarter of last year is likely to be strong and there will probably be a slowdown in the current quarter.

"After a patch of very strong global data around the turn of the year, the news over the last week or so has been more mixed," noted Dominic Wilson, global macro and markets research director at Goldman Sachs. "The reality is that growth momentum is almost certain to be meaningfully slower in Q1."

The poll also showed that economists expect the world economy to have contracted by one percent last year, less than the 1.5 per cent they saw in a July poll. They see a stronger bounce back, with world growth of 3.6 per cent this year compared with 2.5 per cent seen in July.

As a group, economists say the Federal Reserve won't hike until the third quarter, the European Central Bank and the Bank of England won't until the fourth quarter and the Bank of Japan looks set to have near-zero rates until well into 2011.

Similar Reuters polls on Asian nations came to a different conclusion, forecasting interest rate hikes by September and possibly in India and South Korea as early as March.

Asia's economic powerhouse, China, which is on course to surpass Japan as the world's second largest economy, is expected to grow 9.5 per cent this year. That was upgraded significantly from nine per cent in a similar poll conducted in October.

"Tightening might still arrive at a faster pace than markets expect," said Mr Wilson. Other than rising inflation, what may usher in interest rate hikes sooner than previously anticipated is if economists are correct in what they now see as a better outlook for jobs.

They have taken the hatchet to the peak unemployment rate forecast across most G7 countries and they have knocked it down particularly sharply in the UK.

But economists, who as a group didn't see the magnitude of the Great Recession coming and who were slow to forecast how quickly economies would emerge from recession, remain cautious.

"Look for the tortoise rather than the hare," said Azad Zangana at Schroders Investment Management.

That sentiment was echoed by London-based consultancy Capital Economics, which has taken a consistently downbeat tone.

"The recession has ended in most countries in the narrow sense that GDP is picking up again," said analysts in their global note. "But this is still a 'feel bad' recovery, where consumers are unwilling to contribute as much as they would usually do, even if they are able."

The eurozone growth outlook is certainly modest, reflected in the recent fall in the euro to six-month lows against the dollar.

Economists have chopped their eurozone view to 0.4 per cent growth from a previous 0.5 per cent for the fourth quarter of last year, slowing to 0.3 per cent in the current period and each subsequent quarter of 2010, according to the poll.

That view was backed up by data from Markit showing its flash composite PMI for the 16-country bloc slipped in January. That still showed growth, just a slower pace.

But unlike in polls throughout 2009, it appeared very few analysts are expecting rich economies to slip back into recession once the extraordinary policy stimulus from governments and central banks to fight off the Great Recession winds down.

Stuart Bennett, eurozone economist at Calyon, summed it up like this: "The course of true love never runs smooth, so why should we expect economic recoveries to?"