Western Economies to Slow, but Recession Unlikely: Poll

Major developed economies are poised for a marked slowdown in coming quarters, led by the United States, although another recession still looks unlikely, a Reuters poll of 250 economists showed on Wednesday.

For the third month in a row, analysts downgraded their growth outlook for the U.S. economy, as better-than-expected jobs and manufacturing data released last week failed to offset a month of mixed news about the world's biggest economy.

Lower growth means the Federal Reserve is now unlikely to start raising interest rates until the third quarter of 2011, the poll forecasts, not in the second quarter as forecast in a poll a month ago.

While major European economies posted their fastest growth rates in years in the second quarter as the United States slowed, the poll showed they too will enter a cycle of meagre quarter-on-quarter growth as fiscal austerity measures take force.

However, a return to recession still looks a remote prospect, with economists seeing about a one-in-five chance of that happening in the U.S., Britain or the euro zone over the next 12 months, and a 30 percent chance in Japan.

"The real risk is sub-par growth for an extended period," said Michelle Girard, senior economist at RBS in Stamford, Connecticut, talking about the U.S. economy.

Respondents in the latest Reuters poll cut their forecasts for annual average U.S. economic growth to 2.7 percent from 2.9 for 2010, and to 2.4 percent from 2.7 percent for 2011.

They cited stubborn unemployment and continued housing market frailty as key reasons for the weakened U.S. outlook — factors that will also slow Europe's recovery.

While analysts bumped up their forecasts for full-year growth in both the euro zone and UK this year after strong second quarter GDP figures, they retained their view for tepid quarter-on-quarter growth for the foreseeable future.

Neither the euro zone nor British economies are expected to exceed quarter-on-quarter growth of 0.6 percent in any quarter from now through to the end of next year.

"Despite the much-improved second-quarter improvement and some decent data so far in the third quarter, the euro zone recovery looks likely to lose some momentum over the coming months," said Howard Archer of IHS Global Insight in London.

Similarly, forecasters in Japan's case do not see quarterly growth topping 0.6 percent in any quarter through to the second half of 2012.

Rates Stay on Hold

The subdued economic outlook means central banks are likely to keep interest rates on hold well into the second half of next year and beyond.

Federal Reserve Chairman Ben Bernanke two weeks ago spoke of his central bank's readiness to extend emergency measures like quantitative easing to support the U.S. economy, rather than of tightening policy.

Economists in the latest Reuters poll gave Bernanke a median score of 7 out of 10 for his handling of the current crisis.

European central bankers will wait to see the impact of harsh fiscal austerity measures before deciding to move on interest rates.

"If the (UK) government's plans to cut the deficit are seen to be credible, we consider that the positive impact of this on consumer, business and investor sentiment could offset some of the immediate downside risk to growth from the cuts themselves," said Danielle Haralambous of 4Cast in London.

In Japan's case, the strong yen, which hit a 15-year high against the dollar on Wednesday, will prevent any rate move from the Bank of Japan for the foreseeable future from its current stance of 0.1 percent.

"The impact of the strong yen is a bit worrying. It's a risk factor but as long as the dollar stays above 80 yen, it won't cause the recovery to derail," said Kyohei Morita, chief economist at Barclays Capital.

Japanese machinery orders surged by the most in seven months in July, data showed on Wednesday, but there are strong fears that the strong yen and a slowdown abroad could snuff out a gradual recovery in capital expenditure.