Austerity measures trigger doubts on recovery

Financial Times:

Growing doubts about the strength of the global recovery provided the dominant theme in financial markets this week as a burst of euphoria over China’s decision to allow more flexibility for the renminbi proved short-lived.

Analysts reported mounting concerns that fiscal austerity measures being adopted in Europe could trigger a return to recession for some countries and weigh on the recovery elsewhere. The Federal Reserve hinted at its concerns about the potential impact on the US of Europe’s fiscal woes, as it maintained its pledge to keep interest rates “exceptionally low” for an “extended period”.

The more downbeat mood in the Fed’s assessment of current conditions chimed with evidence of the dire state of the US housing market and a further downward amendment to first-quarter US gross domestic product growth.

“The downward revision from 3.2 per cent in the advanced report to 3 per cent in first revision and now just 2.7 per cent shows that as the Obama/Bernanke stimulus wears off, so does the upward momentum in the economy,” said Steven Ricchiuto, chief economist at Mizuho Securities USA.

“With the banking and consumer sector still struggling with weak balance sheets, exogenous events like the European sovereign debt crisis are more likely to have lasting negative effects on the recovery.”

Posted via email from Jim Nichols