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Global economic recovery faces trouble

London, May 23, 2011

After several strong quarters, the global economic recovery appears to be sputtering. In particular, the industrial sector, a key driver of the bounce-back from a historic worldwide recession, looks to be fraying.

"People need to seriously consider the scenario where global industrial growth, once again, starts to throttle back -- because it's not that far away," said Lakshman Achuthan, managing director of the Economic Cycle Research Institute.

A report on US durables goods orders due on Wednesday should give fresh insight into manufacturing demand after an unexpected plunge in the Philadelphia Federal Reserve Bank's index of May factory activity caught investors by surprise.

Economists are looking for a 2.2 percent decline in durables orders for May, according to a Reuters poll. A closely watched measure of non-defense orders excluding aircraft, seen as a proxy for business investment, is projected to inch up just 0.2 percent.

"This week will bring what is likely to be another round of discouraging news, with May's durable goods orders data pointing to further evidence that the manufacturing recovery is losing momentum," said John Higgins, economist at Capital Economics.

The deterioration in US manufacturing is being exacerbated by a slowdown in Japan, which is essentially in recession in the wake of a devastating earthquake and tsunami.

Japan's pullback has had a perceptible effect on global production, especially in the automobile sector. A report due on Tuesday on Japanese exports is expected to show they plunged 12.4 percent in the year to April. Japan is also set to post a rare trade deficit for April.

Still, not all analysts share in the pessimism, with some believing the soft patch will be fleeting. "The market is now underestimating the resilience of the economic recovery," argues Eric Green, economist at TD Securities.

Japan's central bank held off on further monetary easing this past week, a sign that it expects a relatively quick rebound from the disaster-induced slump.

Haggling in Europe over the size and shape of Greece's bailout package will continue to capture the attention of financial markets, which have been rife with speculation that the country will eventually have to restructure its burdensome debt load of some $470 billion.

A Reuters poll earlier this month showed that among 28 economists and 15 fund managers, only three said a restructuring could be avoided.   

Fitch cut Greece's credit rating by three notches on Friday, pushing it deeper into junk territory, and warned of more downgrades if the EU and the IMF do not produce a credible plan for the debt-ridden country.

Greece's troubles, which have also raised borrowing costs for others like Ireland and Portugal, were exacerbated by the shocking resignation of Dominique Strauss-Kahn, the former head of the International Monetary Fund who has been accused of sexually assaulting a hotel employee in New York.

The IMF plays a key role in the debt negotiations, and some fear the leadership vacuum could derail the talks. John Lipsky, a former vice chairman of JP Morgan and previously the No 2 official at the Fund, has taken over the role of managing director in the interim. - Reuters




Tags: Recession | Economic Recovery | industrial growth |

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