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 percent 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 percent they saw in a July poll. They see a stronger bounce back, with world growth of 3.6 percent this year compared with 2.5 percent seen in July.
RATES TO STAY LOW: 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 percent this year. That was upgraded significantly from 9.0 percent in a similar poll conducted in October. "Tightening might still arrive at a faster pace than markets expect," said 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.