Global growth to stay steady but troubles abound

LONDON — The world economy should expand steadily this year and the next thanks mainly to prospering emerging powers, a Reuters poll showed, but fiscal troubles lurking in Europe and potentially the United States risk blowing this view apart.

The quarterly survey of more than 350 economists showed a dimmer outlook for most of the rich-world G-7 economies since the last survey in April. Only Germany, booming thanks to buoyant exports, is expected to post growth averaging more than 3% this year. Elsewhere, fiscal austerity in Europe and growing debt fears have soured analysts’ sentiment.

By contrast, emerging powers like China have enjoyed near double-digit annual growth rates since the global recession — but they face risks of their own, struggling to contain rampant inflation that has accompanied fervent growth.

Economists pointed to the fiscal crisis raging in the euro zone’s peripheral countries and the political deadlock in the United States surrounding an increasingly urgent lift to the country’s legal debt ceiling as the biggest risks to global economic growth.

“If the [euro zone] debt crisis is mishandled, it’s a major threat. But it’s a threat comparable to the mishandling of the US sovereign debt crisis. It’s six and two threes,” said Willem Buiter, chief economist at Citi.

The poll showed the world economy expanding 4.1% this year and 4.3% next year, little changed from April’s survey.

Mr. Buiter said that authorities in emerging markets are largely behind the curve in monetary policy, which could leave open the prospect that their boom could become a bubble and then a bust-but not for a couple of years.

While economists cut their US economic outlook compared with a poll published last month, they still see the United States performing better this year than struggling European peers like Britain, Italy and France. They saw the US economy growing an average 2.5% this year, before picking up to 3.0% next year — comfortably in excess of the sub-2% growth rates seen for this year for Europe’s G7 members, excluding Germany.

“It was the surge in oil and gasoline prices that hurt the [US] economy the most in the first half, and now that they’re down, that should take the weight off,” said Mark Zandi, chief economist of Moody’s Analytics.

The dimming US outlook has had a knock-on effect for Canadian growth prospects this year, with economists applying a hefty downgrade to their quarterly growth profiles.

Still, the focus over the next few months will be averting sovereign defaults in both the euro zone and the United States. While the euro zone question is one of fundamental solvency, most notably in Greece, the US problem is a political one.

Economists remain confident that US lawmakers will reach a deal to raise the government’s debt ceiling. All but two of 40 economists polled said a deal would be reached.

“They will squeak something out, but the odds of failure have increased,” said Chris Lowe, chief economist for FTN Financial and one of the economists surveyed.

The poll was conducted from Friday to Wednesday and was completed before House Republican leader Eric Cantor said President Barack Obama walked out of a meeting last Wednesday evening, escalating concerns about the negotiations.

Lawmakers disagree over budget deficit reduction measures that are a condition for extending the legal $14.3-trillion borrowing limit — needed so the US government can fund its commitments next month.

In Europe, Greek Prime Minister George Papandreou said the euro zone and International Monetary Fund must quickly approve a bailout to avoid a collapse of Greece’s economic reform plans.

While Germany has recently topped the European — and G7 — growth charts, peripheral strugglers like Greece, Ireland, Spain and Italy will drag hard on the euro zone’s economic performance.

The 17-nation bloc’s economy will probably grow just 0.4% per quarter from here until next April. That would be slower than the 0.8% rise seen in the first quarter of this year.

Economists in the poll also left their 2011 and 2012 growth forecasts unchanged at 2.0% and 1.7%, respectively. By contrast, the German GDP growth outlook for this year and next was 3.4% and 1.9%.

Unlike Germany, Britain’s economy probably struggled to generate meaningful growth in the second quarter and its prospects ahead look likely to be jaded by fierce fiscal austerity measures and high inflation.

Japan’s recovery from the March 11 earthquake and tsunami that killed at least 21,000 people looks likely to proceed at a faster pace than thought even last month, helped by a restoration of factory output. — Reuters