The world’s top policymakers offered their brightest assessment of the global economy in months, saying it was stabilising and could start growing again as soon as late this year.
Australia’s central bank governor Glenn Stevens on Tuesday joined a growing chorus of officials predicting the economy should start pulling out of its worst recession in more than six decades later this year.
”Developments over recent months are certainly consistent with the view that a recovery will get under way towards the end of the year,” Stevens said in a speech.
The improved outlook still comes with a health warning that any recovery would be slow and bumpy, with unemployment set to rise further in most economies and business investment weak.
Yet markets took heart from policymakers’ comments and signs that the economy was bottoming out after a disastrous first quarter when the United States and eurozone economies contracted more than expected.
A private survey showing US homebuilder sentiment reached an eight-month peak in May and an upbeat outlook from US home improvement retailer Lowe’s Cos also boosted market confidence.
Analysts expect US housing starts data due later on Tuesday to show a rise to 520 000 in April, adding to evidence of some improvement in the market, whose collapse in mid-2007 triggered the global crisis.
In Europe, the German ZEW investor sentiment index is also expected to improve, rising for a seventh consecutive month in May to its highest since June 2007.
The sense of optimism helped spur a 3% rally in Wall Street stocks and Asian shares followed on Tuesday, with the Nikkei up 2,8%. The measure of stocks’ performance elsewhere in Asia rose 2,7%, scaling a seven-month high.
Less fear
In another sign of returning confidence, the Chicago Board Options Exchange Volatility Index, Wall Street’s favourite barometer of investor fear, hit its lowest level in more than eight months on Monday.
”Market sentiment has turned more positive after solid gains overnight on Wall Street on the back of better-than-expected economic data,” said Kim Seung-han, market analyst at HI Investment & Securities in South Korea.
Analysts said there was still some caution in the market ahead of Japanese data on Wednesday expected to show the world’s second-largest economy contracted 4,2% in the first quarter, likely its worst performance since World War II.
Investors, however, have largely written off the first quarter data as the recession’s low point and increasingly focus on what data and policymakers have to say about the future … and the prevailing message is of cautious optimism.
World Bank President Robert Zoellick said on Monday the global downturn was abating and growth could resume this year or next, and European Central Bank Vice-President Lucas Papademos sounded more upbeat about Europe’s prospects.
Only a week ago, Zoellick highlighted the high degree of uncertainty about the world economy’s future, while Papademos’ take on the eurozone was more optimistic than the ECB’s base scenario of recovery only taking hold next year.
”Our central scenario continues to be that the recovery of the European economy, and of the eurozone in particular, will gradually take place during next year,” Papademos told Athens News Agency in an interview. ”But recent evidence may be suggesting it could come a little sooner … meaning towards the end of 2009.”
Tempering enthusiasm
In a sign that the US banking industry was finding its feet again, Goldman Sachs Group, Morgan Stanley and other banks have applied to repay billions of dollars in government aid, according to sources familiar with the situation.
Many central banks and governments around the world have paused in recent weeks after slashing interest rates to record lows and ramping up budget spending, reflecting hopes that they may have done enough to revive economic growth.
At the same time, top officials were hard at work tempering market hopes for a speedy recovery.
One concern is that such expectations may prematurely drive up market rates, threatening to choke off the fragile recovery before it takes hold.
The Reserve Bank of Australia’s Stevens said growth was likely to be ”pretty slow” in the first stage of recovery and the International Monetary Fund’s No 2 official, John Lipsky, warned that consumer demand in advanced economies may not return to pre-crisis levels.
US Treasury Secretary Timothy Geithner said the US economy has ”clearly stabilised”, but added: ”It’s not going to feel better for a long time for millions of Americans.” — Reuters