World economy to keep strong but risks abound

The world economy should expand steadily this year and 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 from all over the world showed a dimmer outlook for most of the rich-world G7 economies since the last survey in April.

Only Germany, booming thanks to buoyant exports, is now 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 economic growth.

Economists pointed to the fiscal crisis raging in the euro zone's periphery, and the political deadlock in the US surrounding an increasingly urgent lift to its 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.

Buiter also 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 it performing better this year than its 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 also has had a knock-on effect for Canadian growth prosepcts this year, with economists applying a hefty downgrade to their quarterly growth profiles.

Default?

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.

US President Barack Obama clashed with opposition Republicans on Wednesday over a meeting on budget deficit reduction measures that are a condition extenting of the legal USD 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 its economic reform plans collapsing.

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 currency bloc'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%.

"Germany's growth will remain above average, by historic and euro zone standards, so long as the euro zone doesn't totally fall apart and leave just a core group of countries remaining," said Timo Klein, an economist at IHS Global Insight.

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

Japan recovers

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 factories restoring output.

The world's third-largest economy likely contracted for a third straight quarter in April-June but Japan is likely to emerge from recession this quarter as it shakes off supply constraints more quickly than expected, according to the poll of around 30 economists.

"Automakers are pushing forward production plans and companies are making efforts to limit the impact of summer power shortages on output," said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.

"We expect factory output to normalise in July-September."