Long list of dangers ahead for global economy

Sun Oct 30, 2011 4:06pm EDT
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By Stella Dawson

WASHINGTON (Reuters) - Europe's long shadow is tempering a burst of optimism that the United States can escape recession and China achieve a soft landing.

Deep concern persists that European leaders will fall short when they try to flesh out the details of how their rescue fund can tap sufficient resources to backstop Greece and to handle a potential government financing crisis in Italy or Spain.

Europe is looking to emerging economies to provide the extra financial firepower to strengthen the fund four- to five-fold, to about 1 trillion euros, a promise that could materialize at a Group of 20 summit in France on Thursday and Friday.

The response so far from China on strengthening the fund has been very cautious, and market experts want to see a fund with resources twice the size under discussion in Brussels. That has set the stage for possible unsettling disappointment in the days ahead.

"If the absolute amount is not enough, we will be back to the storms. The break in the clouds may only last a few hours," said Ellen Zentner, senior U.S. economist at UBS.

Stronger-than-expected U.S. corporate earnings last week and third-quarter U.S. growth at a solid 2.5 percent, underpinned by surging business investment and a pick-up in consumer spending, have buoyed prospects for the global economy.

The drawdown in inventories in the third quarter also points to solid U.S. growth continuing through the end of the year.

Several Wall Street firms revised up their outlooks. JP Morgan raised its fourth-quarter economic growth forecast to 2.5 percent from 1 percent.   Continued...