Financial markets, of course, knew deep down that the Federal Reserve would have to start withdrawing its extraordinary monetary stimulus once the U.S. economy was out of the emergency ward.

But bond yields have climbed and share prices have sagged globally since the Fed chairman shocked investors on May 22 by saying the bank might ‘take a step down’ in the pace of bond purchases in coming months.

Bernanke has the opportunity to recalibrate expectations when he briefs the media on Wednesday after a two-day meeting of the central bank’s policy-making panel.

The Fed chief cannot disavow last month’s remarks. But, given the scale of the subsequent asset-market selloff, he is expected to indicate that the economy is still too poorly to justify slowing the pace of bond buying, now $85 billion a month, right away.

And as for raising interest rates from near zero, that day remains distant.

“The confusion since May 22 will force them to make clarity a high priority at this upcoming meeting,” said Ward McCarthy, chief financial economist at Jefferies in New York.

A TAPERING TIMETABLE?

To that end, McCarthy speculated that the Fed might map out its base-case starting date for reducing bond buying along with a preliminary schedule of the wind-down, subject to the usual caveats on growth, inflation and financial markets.

“The problem is they can’t use a light switch. They have to have discretion because nobody knows what the future bears, so they will never give up their flexibility – and nor should they,” he said.

Manufacturing surveys from New York and Philadelphia due this week, as well as a national poll of homebuilders, are unlikely to suggest the need for a swift tapering of the Fed’s accommodative stance.

McCarthy reckons the economy is expanding at a pace of about 2 percent, but that might falter unless inventory accumulation picks up.

Indeed, many economists expect the Fed to nudge down its central forecasts for 2013 growth and inflation.

“All in all, conditions for a self-sustaining recovery are not yet in place,” said Douglas Roberts, an economist with Standard Life in Edinburgh. “If anything, weak inflationary pressures are giving the Fed a clear mandate to focus on getting economic growth up and running again.”

G8 OPTIMISM, PMI PESSIMISM

The tightening in financial conditions represented by lower share prices and higher bond yields is an additional headwind for a global economy still growing well below trend due to the after effects of the great financial crisis.

But leaders of the Group of Eight major powers, meeting in Northern Ireland on Monday and Tuesday, can be expected to try to bolster confidence by accentuating the positive.

The G8 communiqué was likely to reflect a “somewhat better situation in the global economy” than the year before, according to a senior European official.

Somewhat is the operative word. Data provider Markit’s purchasing managers’ index (PMI) for China on Thursday is likely to provide further evidence of a slowdown in the world’s second-largest economy.

The euro zone’s PMI is expected to have edged higher in June but will still point to shrinking output in the 17-country bloc zone, which has been in recession for the past six quarters.

“The pace of deterioration has declined. That’s the best thing that can be said,” according to Jens Larsen, chief European economist at Royal Bank of Canada in London.

Recent indicators were consistent with a modest recovery in either the third or fourth quarter, he said.

“It’s not a lot more than that. I’m not particularly confident about the euro area. Equally, I feel more comfortable that the euro area is not heading south at a pretty fast rate and the chances of a large-scale monetary response from the ECB are now pretty small,” Larsen said.

(Additional reporting by Luke Baker in Brussels; Editing by Susan Fenton)

With the euro zone economy in recession, momentum is building for the ECB to lower interest rates for the first time since July 2012, according to senior sources involved in the deliberations.

If the bank does not act on Thursday, a quarter-point cut in June is considered a racing certainty.

The ECB is the most conservative of the world’s main central banks. Its main short-term rate, now at 0.75 percent, is higher than the equivalent rate of the Fed, the Bank of England and the Bank of Japan. And unlike its peers the ECB has not engaged in quantitative easing – printing new money to buy bonds.

But the ECB seems to be softening. “I would argue that the ECB should be thinking of easing policy; whether they are currently is more debatable,” said Stephen King, global chief economist for HSBC in London.

Only a small majority of 76 economists polled by Reuters expected a cut as early as this week.

The swing factor for King is what is happening to Germany, the euro zone’s largest economy. Until recently, Germany had been showing resilience thanks to its export sector. But April’s survey of purchasing managers and the Munich IFO institute’s monthly poll were distinctly soft.

“Germany is becoming more like everybody else. It is being dragged down, whether it likes it or not, through weakness in southern Europe, slowing growth in China and the depreciation of the Japanese yen,” he said.

“None of these things are good for Germany. So the weaker Germany becomes, the easier it is to agree on a common monetary policy,” he added.

China’s official purchasing managers’ survey for April, to be released on Wednesday, is likely to provide more evidence that the world’s second-largest economy is shifting down to a lower trend rate of growth after three decades of averaging around 10 percent a year.

Economists polled by Reuters expect the index derived from the survey to have edged up to 51.0 from 50.9 in March, holding above the threshold of 50 that demarcates month-on-month expansion from contraction.

Jian Chang, who tracks the Chinese economy for Barclays in Hong Kong, prefers to describe the economy as being in a stabilisation rather than a recovery phase.

“As long as the PMI comes in above 50 it will show that modest, slow growth is continuing,” she said.

Global markets have become addicted to the drug of super-fast Chinese growth and tend to react badly to signs of softness. But Chang said the authorities in Beijing, intent on guiding the economy to a more sustainable growth rate, are not panicking.

There has been no big investment package, for example, to support the government’s urbanisation drive.

Policymakers will be comfortable as long as growth for the year as a whole comes in above their target of 7.5 percent, she said. Barclays is forecasting an outcome of 7.9 percent.

Whether that target is met will depend in part on an improvement in exports to the European Union and to the United States, which on Friday reported a disappointingly soft first-quarter gross domestic product growth rate of 2.5 percent.

The pace of expansion has averaged just 1.4 percent over the last two quarters and 1.8 percent over the past year, noted Jay Feldman, director of U.S. economic research at Credit Suisse in New York.

“All in all, growth is persistent, but decidedly underwhelming. At this trajectory, achieving a labour market recovery beyond the fits-and-starts progress of the last few years will be a challenge,” he told clients.

Figures this week are likely to fit into the same pattern.

The Institute of Supply Management’s April manufacturing survey is forecast to dip to 51.0 from 51.3 in March, while the economy is likely to have generated 150,000 jobs in April, up from just 88,000 in March but not enough to reduce the jobless rate from 7.6 percent.

Because the Fed has pledged to stick to its super-loose policy until unemployment falls to 6.5 percent, the central bank is expected to confirm at this week’s policy meeting that it will keep buying $85 billion in bonds every month to keep bond yields low and encourage investment.

Talk had started to grow that the Fed might start to wind down, or taper its quantitative easing programme. But after the latest economic data, the central bank’s tone is likely to change, according to Steve Ricchiuto, chief U.S. economist for Mizuho Securities in New York.

“They’re going to come out of this meeting with a more balanced view on tapering and say, ‘we could increase or we could taper’,” he said.

Indeed, price pressures are so muted because of slack in the economy that some Fed policymakers have raised the prospect of injecting even more stimulus.

The core personal consumption expenditure deflator, the Fed’s favourite inflation gauge, rose just 1.3 percent in the year to March, Friday’s GDP report showed.

“Low inflation leaves that much more leeway for the Fed to focus on growth and jobs. If the core PCE index falls much farther, look for ‘inflation being too low’ to show up in more Fed communications,” Feldman said.

(Editing by Greg Mahlich)

With the euro zone economy in recession, momentum is building for the ECB to lower interest rates for the first time since July 2012, according to senior sources involved in the deliberations.

If the bank does not act on Thursday, a quarter-point cut in June is considered a racing certainty.

The ECB is the most conservative of the world’s main central banks. Its main short-term rate, now at 0.75 percent, is higher than the equivalent rate of the Fed, the Bank of England and the Bank of Japan. And unlike its peers the ECB has not engaged in quantitative easing – printing new money to buy bonds.

But the ECB seems to be softening. “I would argue that the ECB should be thinking of easing policy; whether they are currently is more debatable,” said Stephen King, global chief economist for HSBC in London.

Only a small majority of 76 economists polled by Reuters expected a cut as early as this week.

The swing factor for King is what is happening to Germany, the euro zone’s largest economy. Until recently, Germany had been showing resilience thanks to its export sector. But April’s survey of purchasing managers and the Munich IFO institute’s monthly poll were distinctly soft.

“Germany is becoming more like everybody else. It is being dragged down, whether it likes it or not, through weakness in southern Europe, slowing growth in China and the depreciation of the Japanese yen,” he said.

“None of these things are good for Germany. So the weaker Germany becomes, the easier it is to agree on a common monetary policy,” he added.

China’s official purchasing managers’ survey for April, to be released on Wednesday, is likely to provide more evidence that the world’s second-largest economy is shifting down to a lower trend rate of growth after three decades of averaging around 10 percent a year.

Economists polled by Reuters expect the index derived from the survey to have edged up to 51.0 from 50.9 in March, holding above the threshold of 50 that demarcates month-on-month expansion from contraction.

Jian Chang, who tracks the Chinese economy for Barclays in Hong Kong, prefers to describe the economy as being in a stabilisation rather than a recovery phase.

“As long as the PMI comes in above 50 it will show that modest, slow growth is continuing,” she said.

Global markets have become addicted to the drug of super-fast Chinese growth and tend to react badly to signs of softness. But Chang said the authorities in Beijing, intent on guiding the economy to a more sustainable growth rate, are not panicking.

There has been no big investment package, for example, to support the government’s urbanization drive.

Policymakers will be comfortable as long as growth for the year as a whole comes in above their target of 7.5 percent, she said. Barclays is forecasting an outcome of 7.9 percent.

Whether that target is met will depend in part on an improvement in exports to the European Union and to the United States, which on Friday reported a disappointingly soft first-quarter gross domestic product growth rate of 2.5 percent.

The pace of expansion has averaged just 1.4 percent over the last two quarters and 1.8 percent over the past year, noted Jay Feldman, director of U.S. economic research at Credit Suisse in New York.

“All in all, growth is persistent, but decidedly underwhelming. At this trajectory, achieving a labor market recovery beyond the fits-and-starts progress of the last few years will be a challenge,” he told clients.

Figures this week are likely to fit into the same pattern.

The Institute of Supply Management’s April manufacturing survey is forecast to dip to 51.0 from 51.3 in March, while the economy is likely to have generated 150,000 jobs in April, up from just 88,000 in March but not enough to reduce the jobless rate from 7.6 percent.

Because the Fed has pledged to stick to its super-loose policy until unemployment falls to 6.5 percent, the central bank is expected to confirm at this week’s policy meeting that it will keep buying $85 billion in bonds every month to keep bond yields low and encourage investment.

Talk had started to grow that the Fed might start to wind down, or taper its quantitative easing program. But after the latest economic data, the central bank’s tone is likely to change, according to Steve Ricchiuto, chief U.S. economist for Mizuho Securities in New York.

“They’re going to come out of this meeting with a more balanced view on tapering and say, ‘we could increase or we could taper’,” he said.

Indeed, price pressures are so muted because of slack in the economy that some Fed policymakers have raised the prospect of injecting even more stimulus.

The core personal consumption expenditure deflator, the Fed’s favorite inflation gauge, rose just 1.3 percent in the year to March, Friday’s GDP report showed.

“Low inflation leaves that much more leeway for the Fed to focus on growth and jobs. If the core PCE index falls much farther, look for ‘inflation being too low’ to show up in more Fed communications,” Feldman said.

(Editing by Greg Mahlich)

The population of some countries is stagnant or already shrinking, notably Germany’s. That will reduce savings and potential economic growth.

The workers who remain are getting older and so are less productive. That will hold back living standards.

And the ranks of retirees are swelling. That will threatening the financing of pensions and health care.

In the 27 countries of the European Union, each pensioner is today supported on average by four people of working age. By 2050, this old-age support ratio will have fallen to just 2:1, according to United Nations and EU projections.

Latvia, which has applied to join the euro in 2014, is but an extreme example of these trends. By 2060 there will be four Latvians of working age for every three aged 65.

Because of emigration and low fertility, the Baltic state’s population shrank by 14 percent, or 340,000 people, between 2000 and 2011, prompting warnings of an existential threat to the nation.

“I don’t want to make apocalyptic statements. I hope that the country can manage. But the alarm bell has rung,” said Mihail Hazans, an economics professor at the University of Latvia and the county’s leading demographer.

ALARM BELLS

Many European countries are raising the retirement age. And some, including Britain, have favorable population profiles.

But Martins Kazaks, chief economist with Swedbank in Riga, said governments had yet to grasp the magnitude of the policy shifts required.

“If you define the tipping point as the point of no return, then in some respects we have passed it – and not only us, but most of Europe,” Kazaks said.

“With an ageing population and the burden of pensions and welfare, the growth rate is going to be lower. If you don’t do anything today, the future is going to be a lot more difficult,” he added.

Policymakers need look no farther than low-growth Japan to grasp the economic impact of population decline and ageing.

“Europe is the new Japan,” said Douglas Roberts, an economist with Standard Life in Edinburgh.

Apart from putting pension systems on a more sustainable footing, investing in education and training so that workers are more productive should be a policy priority, economists say. So should expanding child care to allow more women to join or stay in the work force.

How to share out the cost of ageing spells potential political trouble, pitting cosseted pensioners against younger generations who are overtaxed and overworked.

George Magnus, a senior economic adviser to Swiss bank UBS in London, said it was understandable because of the euro zone crisis that the current focus was on the near-term affordability of welfare.

“But behind that is a very structural issue, which is really about the social model and the rights and obligations of citizens vis-a-vis the state. We are going to have to have that debate,” said Magnus, author of “The Age of Aging”.

Edward Hugh, an economist in Barcelona, agreed that the sovereign debt crisis gripping the developed world was at root about how to meet implicit liabilities for ever older populations: expectations of future levels of health care and pension provision may prove too optimistic.

As such, Hugh is critical of policymakers in Europe and at the International Monetary Fund for neglecting the impact of demographic change.

“In the absence of policies that acknowledge these issues exist and that then address them, none of the sustainability analyses – debt, financial sector, whatever – are worth the paper they have been written on,” he said.

PORTUGAL’S POPULATION PAINS

Recession-hit Portugal also illustrates the vicious economic and fiscal circle that Hugh identifies in countries on the periphery of the euro zone as a result of demographics.

Portugal’s fertility rate, which stood at 1.32 last year, has been below the 2.1 replacement rate – the number of children each woman needs to have to maintain current population levels – since the early 1980s.

In 2012, only 90,000 children were born, the lowest number in more than a century, as economic fears gave couples pause.

In short, ageing is pre-programmed. By 2050, Portugal is projected to have more people aged 60 or over than any other EU member – 40 percent of the population against 24 percent today.

What’s more, some 100,000 to 120,000 Portuguese, or 1 percent of the population, are emigrating every year to look for better-paid work, depleting the tax base and adding to the strain of financing the welfare state.

“One of the biggest problems we have is holding on to employees,” said Joao Carlos Costa, general manager of Arpial, a metal-working firm in Lisbon.

Jose Cesario, secretary of state for Portuguese communities abroad, puts a brave face on the drain of brain and brawn.

Emigrants acquire valuable skills and remitted some 2.7 billion euros in 2012. Influential members of the Portuguese diaspora of around 5 million can also act as ‘ambassadors’ for the country, Cesario said in an interview.

But he acknowledged that both Switzerland and Luxembourg had urged him to slow the flow of emigration.

“It’s the fish that bites its own tail,” Cesario said, using a Portuguese proverb. “We can get emigrants to come back only if we have economic development, but we cannot do that without them.” If he had the solution, Portugal would not be in the situation it is, he added.

LATVIAN EXODUS

The same goes for Latvia.

“It’s a big challenge for Latvia, both for the economy and for our society.” Prime Minister Valdis Dombrovskis told Reuters. “What we need to concentrate on now is economic growth and job creation so that people see perspectives here in Latvia and so don’t have to leave.”

The government also hopes to lure back 100,000 emigrants, or a third of those who have left since the turn of the century, by 2030.

Given that Latvia is one of the poorest countries in the EU, that will not be easy. “We’re not expecting people to pack their bags and be here on Monday,” said Dace Acule, a public policy researcher in Riga who has worked on a proposed package of incentives.

One emigrant unlikely to be tempted back is Datsa Gaile, who has been in Britain since 2006. She left Latvia because, as a single mother, she was unable to bring up her two sons on a wage of about 150 lats ($275) a month.

After a rocky start, she learned English, got a string of ever-better jobs and now runs Anglo Baltic News (www.anglobalticnews.co.uk), a website aimed at the estimated 100,000 Latvians in Britain.

“The main problem at the moment is that there are not enough jobs in Latvia. It’s a bit risky if you decide to go back,” said Gaile, who lives in Northampton, a town in central England that is home to 8,000 Latvians.

“Also, I have been away for almost eight years and my lifestyle has changed. People are different here. They have more opportunities in this country,” she added.

Professor Hazans of the University of Latvia said at most 20 percent of recent emigrants might return. What’s more, his surveys show that the proportion of ‘firm stayers’, who have no thought of leaving Latvia, has fallen to a quarter from a third since 2010.

As in Portugal, a vicious economic circle becomes hard to break.

“Emigration sends a negative signal to foreign investors. It also sends a negative signal for domestic business startups,” Hazans said. “You think about how many potential customers you will have.”

The psychological harm of sustained emigration, which has accounted for two-thirds of Latvia’s population decline since 2000, is as striking as the economic damage. Women’s fertility rate has dropped to 1.1, one of the lowest in the world.

Acule, the policy researcher, spoke of the “demographic sadness” of a country where most people have a relative working abroad.

Hazans added: “The sense of bitterness is still very much there. Why? A feeling that if everyone is leaving the boat, the boat must be sinking. Or if the boat is afloat and others are leaving, why am I staying?”

The imperative, then, is for Latvia to sustain its recovery from a deep recession in 2008/09, when output slumped by 20 percent as the government opted for austerity rather than devalue its way out of the financial crisis.

Whether it be in Latvia or Portugal – or eastern European countries such as Bulgaria and Romania – only more and better-paid jobs will stop the hemorrhaging of people and perhaps improve longer-term demographic prospects.

“If you get the chance to live and work normally in our country, it’s a luxury. It’s a luxury to be able to stay,” said Dace Beinare, an adviser with SOS Children’s Villages, a non-governmental organization in Riga.

(Additional reporting by Aleks Tapinsh in Riga and Daniel Alvarenga in Lisbon; Editing by Giles Elgood)

The population of some countries is stagnant or already
shrinking, notably Germany’s. That will reduce savings and
potential economic growth.

The workers who remain are getting older and so are less
productive. That will hold back living standards.

And the ranks of retirees are swelling. That will
threatening the financing of pensions and health care.

In the 27 countries of the European Union, each pensioner is
today supported on average by four people of working age. By
2050, this old-age support ratio will have fallen to just 2:1,
according to United Nations and EU projections.

Latvia, which has applied to join the euro in 2014, is but
an extreme example of these trends. By 2060 there will be four
Latvians of working age for every three aged 65.

Because of emigration and low fertility, the Baltic state’s
population shrank by 14 percent, or 340,000 people, between 2000
and 2011, prompting warnings of an existential threat to the
nation.

“I don’t want to make apocalyptic statements. I hope that
the country can manage. But the alarm bell has rung,” said
Mihail Hazans, an economics professor at the University of
Latvia and the county’s leading demographer.

ALARM BELLS

Many European countries are raising the retirement age. And
some, including Britain, have favourable population profiles.

But Martins Kazaks, chief economist with Swedbank in Riga,
said governments had yet to grasp the magnitude of the policy
shifts required.

“If you define the tipping point as the point of no return,
then in some respects we have passed it – and not only us, but
most of Europe,” Kazaks said.

“With an ageing population and the burden of pensions and
welfare, the growth rate is going to be lower. If you don’t do
anything today, the future is going to be a lot more difficult,”
he added.

Policymakers need look no farther than low-growth Japan to
grasp the economic impact of population decline and ageing.

“Europe is the new Japan,” said Douglas Roberts, an
economist with Standard Life in Edinburgh.

Apart from putting pension systems on a more sustainable
footing, investing in education and training so that workers are
more productive should be a policy priority, economists say. So
should expanding child care to allow more women to join or stay
in the work force.

How to share out the cost of ageing spells potential
political trouble, pitting cosseted pensioners against younger
generations who are overtaxed and overworked.

George Magnus, a senior economic adviser to Swiss bank UBS
in London, said it was understandable because of the euro zone
crisis that the current focus was on the near-term affordability
of welfare.

“But behind that is a very structural issue, which is really
about the social model and the rights and obligations of
citizens vis-a-vis the state. We are going to have to have that
debate,” said Magnus, author of “The Age of Aging”.

Edward Hugh, an economist in Barcelona, agreed that the
sovereign debt crisis gripping the developed world was at root
about how to meet implicit liabilities for ever older
populations: expectations of future levels of health care and
pension provision may prove too optimistic.

As such, Hugh is critical of policymakers in Europe and at
the International Monetary Fund for neglecting the impact of
demographic change.

“In the absence of policies that acknowledge these issues
exist and that then address them, none of the sustainability
analyses – debt, financial sector, whatever – are worth the
paper they have been written on,” he said.

PORTUGAL’S POPULATION PAINS

Recession-hit Portugal also illustrates the vicious economic
and fiscal circle that Hugh identifies in countries on the
periphery of the euro zone as a result of demographics.

Portugal’s fertility rate, which stood at 1.32 last year,
has been below the 2.1 replacement rate – the number of children
each woman needs to have to maintain current population levels -
since the early 1980s.

In 2012, only 90,000 children were born, the lowest number
in more than a century, as economic fears gave couples pause.

In short, ageing is pre-programmed. By 2050, Portugal is
projected to have more people aged 60 or over than any other EU
member – 40 percent of the population against 24 percent today.

What’s more, some 100,000 to 120,000 Portuguese, or 1
percent of the population, are emigrating every year to look for
better-paid work, depleting the tax base and adding to the
strain of financing the welfare state.

“One of the biggest problems we have is holding on to
employees,” said Joao Carlos Costa, general manager of Arpial, a
metal-working firm in Lisbon.

Jose Cesario, secretary of state for Portuguese communities
abroad, puts a brave face on the drain of brain and brawn.

Emigrants acquire valuable skills and remitted some 2.7
billion euros in 2012. Influential members of the Portuguese
diaspora of around 5 million can also act as ‘ambassadors’ for
the country, Cesario said in an interview.

But he acknowledged that both Switzerland and Luxembourg had
urged him to slow the flow of emigration.

“It’s the fish that bites its own tail,” Cesario said, using
a Portuguese proverb. “We can get emigrants to come back only if
we have economic development, but we cannot do that without
them.” If he had the solution, Portugal would not be in the
situation it is, he added.

LATVIAN EXODUS

The same goes for Latvia.

“It’s a big challenge for Latvia, both for the economy and
for our society.” Prime Minister Valdis Dombrovskis told
Reuters. “What we need to concentrate on now is economic growth
and job creation so that people see perspectives here in Latvia
and so don’t have to leave.”

The government also hopes to lure back 100,000 emigrants, or
a third of those who have left since the turn of the century, by
2030.

Given that Latvia is one of the poorest countries in the EU,
that will not be easy. “We’re not expecting people to pack their
bags and be here on Monday,” said Dace Acule, a public policy
researcher in Riga who has worked on a proposed package of
incentives.

One emigrant unlikely to be tempted back is Datsa Gaile, who
has been in Britain since 2006. She left Latvia because, as a
single mother, she was unable to bring up her two sons on a wage
of about 150 lats ($275) a month.

After a rocky start, she learned English, got a string of
ever-better jobs and now runs Anglo Baltic News
(www.anglobalticnews.co.uk), a website aimed at the estimated
100,000 Latvians in Britain.

“The main problem at the moment is that there are not enough
jobs in Latvia. It’s a bit risky if you decide to go back,” said
Gaile, who lives in Northampton, a town in central England that
is home to 8,000 Latvians.

“Also, I have been away for almost eight years and my
lifestyle has changed. People are different here. They have more
opportunities in this country,” she added.

Professor Hazans of the University of Latvia said at most 20
percent of recent emigrants might return. What’s more, his
surveys show that the proportion of ‘firm stayers’, who have no
thought of leaving Latvia, has fallen to a quarter from a third
since 2010.

As in Portugal, a vicious economic circle becomes hard to
break.

“Emigration sends a negative signal to foreign investors. It
also sends a negative signal for domestic business startups,”
Hazans said. “You think about how many potential customers you
will have.”

The psychological harm of sustained emigration, which has
accounted for two-thirds of Latvia’s population decline since
2000, is as striking as the economic damage. Women’s fertility
rate has dropped to 1.1, one of the lowest in the world.

Acule, the policy researcher, spoke of the “demographic
sadness” of a country where most people have a relative working
abroad.

Hazans added: “The sense of bitterness is still very much
there. Why? A feeling that if everyone is leaving the boat, the
boat must be sinking. Or if the boat is afloat and others are
leaving, why am I staying?”

The imperative, then, is for Latvia to sustain its recovery
from a deep recession in 2008/09, when output slumped by 20
percent as the government opted for austerity rather than
devalue its way out of the financial crisis.

Whether it be in Latvia or Portugal – or eastern European
countries such as Bulgaria and Romania – only more and
better-paid jobs will stop the haemorrhaging of people and
perhaps improve longer-term demographic prospects.

“If you get the chance to live and work normally in our
country, it’s a luxury. It’s a luxury to be able to stay,” said
Dace Beinare, an adviser with SOS Children’s Villages, a
non-governmental organisation in Riga.

A preliminary survey of purchasing executives from the 17-country bloc is likely to furnish the new evidence of economic weakness that Jens Weidmann, the president of Germany’s hard-line central bank, says is needed for the European Central Bank to cut interest rates.

The composite index derived from the survey by data providers Markit is likely to be unchanged at 46.5, well below the 50 threshold denoting expansion.

The euro zone economy, in short, remains dead in the water.

“We need more monetary stimulus. What that means to me is lower interest rates,” said Mark Zandi, chief economist at Moody’s Analytics.

Weidmann is among those who believe the ECB’s exact stance matters less than the fact that monetary policy is not being transmitted to all corners of the euro zone.

Borrowing costs on the struggling southern rim are thus much higher than in countries at the euro’s core.

Zandi agreed that cutting the ECB’s main 0.75 percent policy rate would not revive lending by banks, which badly needed strengthening. But lower interest rates would weaken the euro.

That would help exports, especially in Germany, which in turn was key to preserving popular support for emergency measures to stop the euro from breaking up, Zandi argued.

“The most important thing for keeping the euro zone together in the very near term is to make sure that the German economy remains solid and that unemployment remains low. You need the German population to be committed to the euro zone,” he said.

EXPORT HEADWINDS

Germany’s export-orientated economy has held up better than most of its euro zone peers, but a monthly business survey by the Munich IFO economics institute is likely to show a dip, according to economists polled by Reuters.

“When you look at the latest signals from China and the United States, the export growth prospects of German companies have deteriorated significantly,” said Tobias Blattner, an economist with Daiwa Capital Markets in London.

As such, the ECB would be paying close attention to the latest purchasing managers’ indexes not just from the euro zone but from the bloc’s main partners. On a trade-weighted basis, these have fallen in the past couple of months.

Blattner expects a rate cut at May’s ECB meeting. Although most ECB policymakers doubt it would make much difference, he said the symbolism would fan expectations of additional, less conventional steps to spur lending to the periphery.

“They all know that it needs to be accompanied, at the same time or possibly a month later, by some further non-standard measures,” he said. “That’s important. You cut rates and people say the next step must be something that will have an impact.”

QUESTION MARKS OVER U.S. GROWTH

A pair of unexpectedly soft regional Federal Reserve surveys last week reinforced the view that yet another spring slowdown – the fourth in as many years – is unfolding in the United States.

That prospect is likely to take the shine off what promises to be a robust first-quarter GDP report on Friday.

Economists polled by Reuters expect the economy to have expanded at a 3.0 percent clip, up from 0.4 percent in the last three months of 2012, despite the drag of higher payroll taxes and looming across-the-board cuts in federal spending.

The consensus on Wall Street is for full-year growth of around 2 percent, but Jason Ware, chief analyst at Albion Financial Group in Salt Lake City, is penciling in an outcome closer to 2.5 percent.

“The economic pick-up, combined with sustainable gains in housing and business investment, should help propel the expansion through these government budget cuts that we’re going to be dealing with,” he said.

After a puny 88,000 increase in non-farm jobs in March, Ware expects the monthly pace of hiring to climb back to a range of 150,000 to 200,000.

The other big U.S. growth driver will be housing. The annual rate of housing starts jumped 7 percent in March to more than 1 million – a figure Ware called ‘mind-boggling’ given the depths from which the market is recovering – and sales of both new and existing homes are expected to post increases this week.

“Hiring and housing is the story so far,” Ware said. “Those two events together help to repair household finances and that makes us reasonably sanguine about the outlook for the rest of the year.”

(Editing by Toby Chopra)

Having poured $400 billion into commodities over the past
decade, many investors are now selling. Their confidence that
risky assets could only float higher on a rising tide of cheap
central bank money has crumbled as the global economy fails to
respond to the stimulus.

Even China, an important buyer of natural resources, is
slowing. Inflation, against which gold in particular is a
classic hedge, is falling nearly everywhere.

Price pressures will ease further if natural resources keep
falling. That is bad news for exporters such as Saudi Arabia and
Brazil but good news for net importers.

Weaker commodity prices should be positive for the world
economy on average because falling inflation supports consumer
spending, said ABN AMRO economist Han de Jong.

Standard and Poor’s Goldman Sachs Commodity Index
has fallen 6.6 percent so far this year.

But raw materials represent a small part of most firms’
costs, so it is not surprising that some businesses, especially
those in very competitive markets, are not getting carried away.

“There are thousands of components in a car so the impact
might not be that great,” said Cui Liyan with Great Wall Motor
Co Ltd , China’s top maker of SUVs and
pick-up trucks. “Great Wall has never passed on additional costs
to consumers when commodity prices have surged in the past.”

For a U.S. economy experiencing slow growth, cheaper energy
is a positive, said Michael Ward, chief executive of CSX Corp
, the country’s second-largest railroad. But CSX itself
is indifferent because it runs a fuel surcharge programme. “Over
time, we’re passing the increases or decreases in fuel to the
customer,” Ward said.

An official at South Korea’s largest food maker, CJ
CheilJedang Corp, said it normally takes four to six
months before a fall in agricultural futures prices passes
through into the firm’s product prices.

OIL IS THE ONE TO WATCH

The lurches in gold, including the sharpest one-day
drop in 30 years on Monday, have grabbed the attention, but
falling oil prices are of much greater economic significance.

Brent crude is down about 16 percent from the year’s
high at $119.17, hit on Feb. 8.

Economists at JP Morgan estimate a 15 percent drop in the
price of oil, caused by a supply increase, would be enough to
lift global economic output this year by 0.2 percentage points.

But if the price fall reflects a darkening economic outlook,
the same 15 percent decline is consistent with a 0.5 percent
downgrade in global growth prospects for the year, the bank
calculates.

An executive at Indian engineering company Larsen & Toubro
said the broader fall in commodity prices cut both
ways. Cheaper materials would help profit margins and, if the
trend were sustained, would increase the chances of lower
interest rates, he said. But prices were falling for a reason.

“Prices are down today because the investment cycle has
slowed and demand for commodities has slowed. If this extends
over the long term, it cannot be a good thing for a projects
company such as ours,” he said.

THE EXCHANGE RATE FACTOR

Pinpointing the repercussions of the commodity sell off is
further complicated because it cannot be seen in isolation.

KCE Electronics Pcl, a Thai maker of printed
circuit boards, should be sitting pretty because it uses a lot
of copper, which is down 12 percent so far in 2013.

But executive director Panja Senadisai said the savings are
outweighed by the strength of the Thai baht against the dollar,
which hurts KCE’s exports.

The story is similar at Tenneco Inc’s Indian
subsidiary: the auto components maker is seeing lower prices for
steel and rubber – the key Tokyo Commodity Exchange rubber
contract has shed more than 8 percent this week – but a
weak rupee and high inflation are diluting the benefit.

Currencies also muddy the waters for Japan Airlines Co Ltd
, with a weakening yen on balance a negative for the
airline, said JAL spokesman Taro Namba. Still, JAL has already
responded by announcing a 7.6 percent cut in cargo fuel
surcharges from May 1 to 122 yen per kilogram on long-haul
international routes. And Korean Air Lines Co Ltd,
South Korea’s biggest airline, expects a drop in fuel surcharges
to lead to lower passenger ticket prices with a one month’s lag.

PASSING ALONG THE FOOD CHAIN

Cheaper food is a particular boon in countries with
uncomfortably high inflation. Take Indonesia, where inflation
scaled a nearly two-year high of 5.9 percent in March.

Thanks to falling prices for everything from rice to meat
and shallots, the month-on-month rise in consumer prices will
probably be less than 0.1 percent in April, according to deputy
central bank governor Perry Warjiyo.

Business models differ and not everyone is rushing to pass
on cheaper inputs. Danish shipping group A.P. Moller – Maersk
Group is an example.

“Our job is to make sure that the customers understand that
they actually have a big value proposition by shipping with
us… The customers are willing to pay a bit more. This is not a
commodity. There’s more to it than just shipping a box,” said
chief executive Nils Anderson.

With global inflation by and large benign, the door is open
for leading central banks to provide even more monetary
stimulus. St. Louis Fed President James Bullard said he would
favour increasing the pace of the Federal Reserve’s bond buying
if inflation continues to go down. U.S. consumer
prices rose just 1.5 percent in the 12 months through March.

Falling commodity prices and slower wage growth give the
Bank of England more scope to resume bond-buying to try to
galvanise the economy, BOE policymaker Martin Weale argued.
Basic wage growth in Britain has slowed to a
record low.

Even the conservative European Central Bank has hinted that
it is open to doing more. With the bank’s economists forecasting
an inflation rate of just 1.3 percent in 2014, well short of its
target of just under 2 percent, more and more economists expect
an interest rate cut next month.

China too has increased policy room. “The drop in global
commodity prices is obviously very good news for China, because
it will help lessen imported inflationary pressure and leaves
Beijing much more scope to expand credit and loosen monetary
policy to bolster the domestic economy,” said Yuan Gangming, a
researcher at the Chinese Academy of Social Sciences.

INDIA VS AUSTRALIA

India, Asia’s third-largest economy, is hoping that the
commodity rout will not only dampen inflation but also reduce
its twin deficits. Crude and gold imports contribute nearly 45
percent of India’s total import bill.

“The fall will help us deal with the widening current
account deficit, which is the biggest worry for the government,”
said a senior official at the ministry of finance in New Delhi.

India spent $169 billion on foreign oil in the fiscal year
that ended in March, 9 percent more than the year before. That
is a big factor behind a full-year current account deficit
likely to have been around 5 percent of GDP – a level the
central bank governor has called unsustainable..

And because India heavily subsidises consumer fuels and
fertilizer, the government’s budget deficit for the new fiscal
year could well come in below its target of 4.8 percent of GDP
if global commodity prices keep declining, the official added.
The fall in crude prices could halve the oil subsidy bill.

Australia would appear to be an obvious loser from an end to
the commodities super-cycle. The ‘Lucky Country’ has enjoyed
more than 20 years of unbroken growth, largely thanks to booming
exports of minerals and energy to Asia.

Lower commodity prices and a strong Australian dollar have
already forced Treasurer Wayne Swan to slash his forecast for
tax revenues, especially from company earnings and a new profits
tax on big iron ore and copper mines. As a result the government
has had to abandon its promise to return to a budget surplus for
the year ending in June. But Swan remains optimistic about
growth prospects across Asia.

“The growth in the middle classes across the Asian region
will produce demand for a whole range of goods and services, not
just in resources, not just in agriculture, but across a wide
range of activities and I think the consequence of that will
only be good for Australia,” he said.

China on Monday is likely to report a growth rate of 8
percent for the first quarter, according to economists polled by
Reuters.

In the United States, figures on housing starts and a pair
of regional Federal Reserve surveys are expected to depict an
economy that is far from firing on all cylinders but is at least
chugging along.

And Japan is back. Animal spirits and stock prices are
rising in response to the Bank of Japan’s aggressive new
monetary stance aimed at ending two decades of deflation.

What’s more, Prime Minister Shinzo Abe has shown an appetite
to inject more competition into the economy by reaching a deal
with the United States on Friday to pave the way for Tokyo to
join transpacific free trade talks.

By contrast, the European Union’s growth strategy has been a
failure and the economy will continue to stagnate unless bold
steps are taken, according to a study commissioned by the EU
itself.

The 17 countries that use the euro were in recession in 2012
and will probably contract further this year. The sovereign debt
crisis has mutated into a crisis of confidence, undermining
consumer demand and the willingness of businesses to invest.

“It’s so bad things can’t get any worse,” said Steen
Jakobsen, chief economist with Saxo Bank in Denmark. “The man in
the street and companies are as disillusioned as they have ever
been.”

One reason is that the European Central Bank’s (ECB) low
interest rates are not feeding through to struggling economies
on the rim of the euro zone, such as Portugal. Loans generally
remain hard to get and cost a lot more than in northern Europe.

This is where the messy bailout of Cyprus comes in.

CYPRUS FALLOUT

In return for bailing out Cyprus, the ECB, the European
Commission and the International Monetary Fund (IMF) initially
agreed to a levy on all bank deposits, including those insured
up to 100,000 euros.

The plan was shot down within days and the entire burden is
being shifted on to depositors with more than 100,000 euros. But
the damage has been done.

António Horta-Osório, chief executive of Lloyds,
Britain’s biggest retail bank, said the Cyprus fiasco had made
it more difficult for banks to regain the confidence of clients
that was shattered by the financial crisis. Lloyds itself had to
be bailed out and is 39 percent owned by the state.

“Without the trust of our customers, banks are effectively
unable to carry out their role in supporting the recovery and
building a stronger economy,” Horta-Osorio told the British
Portuguese Chamber of Commerce in Lisbon on Friday.

Finance ministers from the Group of 20 leading economies,
who convene on Thursday on the eve of the spring meetings of the
IMF and World Bank, will breathe a sigh of relief that financial
markets have not taken fright at events in Cyprus.

But Derry Pickford, a macro analyst at investment managers
Ashburton in London, said big depositors were bound to get
twitchy the next time banking strains intensify.

“What’s happened with Cyprus has raised risks of systemic
instability,” he said.

HEADWINDS AND TAILWINDS IN AMERICA

The United States has hardly been a model of policy-making
either on the fiscal front.

Because of a failure to agree a long-term deficit reduction
plan, blunt federal spending cuts are being phased in that will
amount to about 0.6 percent of GDP over the next six months. The
resulting drag on the economy will be considerable, according to
Kevin Logan, HSBC’s chief U.S. economist in New York.

Friday’s surprising fall in March retail sales and a weak
sentiment survey suggest that consumers are already responding
to the cuts, which come on top of an increase in payroll taxes
at the start of the year.

On the plus side, business investment and housing are on a
firmer footing and should help the economy notch up full-year
growth of around 2 percent, said Sam Bullard, an economist with
Wells Fargo in Charlotte, North Carolina.

Housing starts, forecast by Reuters to come in at an annual
rate of 930,000 in March, are likely to jump by almost a quarter
in the whole of 2013, albeit from a low level, he said.

“In our baseline forecast, housing is still a primary
support to our call,” Bullard said.

U.S. growth could accelerate next year to around 3 percent,
according to IHS Global Insight, an economic consultancy.

With China purring along and economic momentum in Japan
likely to build in coming quarters, things are not looking bad
for export-dependent Asia, said Rajiv Biswas, the firm’s chief
regional economist in Singapore.

Biswas worries about the danger of a government debt crisis
down the road in Japan and is keeping an eye on risks in China
from fast-growing shadow banking and the property market.

But everything is relative. “When you meet someone coming
from Europe, they can hardly believe that there’s a part of the
world that’s doing so well by comparison with them,” Biswas
said.

China on Monday is likely to report a growth rate of 8 percent for the first quarter, according to economists polled by Reuters.

In the United States, figures on housing starts and a pair of regional Federal Reserve surveys are expected to depict an economy that is far from firing on all cylinders but is at least chugging along.

And Japan is back. Animal spirits and stock prices are rising in response to the Bank of Japan’s aggressive new monetary stance aimed at ending two decades of deflation.

What’s more, Prime Minister Shinzo Abe has shown an appetite to inject more competition into the economy by reaching a deal with the United States on Friday to pave the way for Tokyo to join transpacific free trade talks.

By contrast, the European Union’s growth strategy has been a failure and the economy will continue to stagnate unless bold steps are taken, according to a study commissioned by the EU itself.

The 17 countries that use the euro were in recession in 2012 and will probably contract further this year. The sovereign debt crisis has mutated into a crisis of confidence, undermining consumer demand and the willingness of businesses to invest.

“It’s so bad things can’t get any worse,” said Steen Jakobsen, chief economist with Saxo Bank in Denmark. “The man in the street and companies are as disillusioned as they have ever been.”

One reason is that the European Central Bank’s (ECB) low interest rates are not feeding through to struggling economies on the rim of the euro zone, such as Portugal. Loans generally remain hard to get and cost a lot more than in northern Europe.

This is where the messy bailout of Cyprus comes in.

CYPRUS FALLOUT

In return for bailing out Cyprus, the ECB, the European Commission and the International Monetary Fund (IMF) initially agreed to a levy on all bank deposits, including those insured up to 100,000 euros.

The plan was shot down within days and the entire burden is being shifted on to depositors with more than 100,000 euros. But the damage has been done.

António Horta-Osório, chief executive of Lloyds (LLOY.L: Quote, Profile, Research, Stock Buzz), Britain’s biggest retail bank, said the Cyprus fiasco had made it more difficult for banks to regain the confidence of clients that was shattered by the financial crisis. Lloyds itself had to be bailed out and is 39 percent owned by the state.

“Without the trust of our customers, banks are effectively unable to carry out their role in supporting the recovery and building a stronger economy,” Horta-Osorio told the British Portuguese Chamber of Commerce in Lisbon on Friday.

Finance ministers from the Group of 20 leading economies, who convene on Thursday on the eve of the spring meetings of the IMF and World Bank, will breathe a sigh of relief that financial markets have not taken fright at events in Cyprus.

But Derry Pickford, a macro analyst at investment managers Ashburton in London, said big depositors were bound to get twitchy the next time banking strains intensify.

“What’s happened with Cyprus has raised risks of systemic instability,” he said.

HEADWINDS AND TAILWINDS IN AMERICA

The United States has hardly been a model of policy-making either on the fiscal front.

Because of a failure to agree a long-term deficit reduction plan, blunt federal spending cuts are being phased in that will amount to about 0.6 percent of GDP over the next six months. The resulting drag on the economy will be considerable, according to Kevin Logan, HSBC’s chief U.S. economist in New York.

Friday’s surprising fall in March retail sales and a weak sentiment survey suggest that consumers are already responding to the cuts, which come on top of an increase in payroll taxes at the start of the year.

On the plus side, business investment and housing are on a firmer footing and should help the economy notch up full-year growth of around 2 percent, said Sam Bullard, an economist with Wells Fargo in Charlotte, North Carolina.

Housing starts, forecast by Reuters to come in at an annual rate of 930,000 in March, are likely to jump by almost a quarter in the whole of 2013, albeit from a low level, he said.

“In our baseline forecast, housing is still a primary support to our call,” Bullard said.

U.S. growth could accelerate next year to around 3 percent, according to IHS Global Insight, an economic consultancy.

With China purring along and economic momentum in Japan likely to build in coming quarters, things are not looking bad for export-dependent Asia, said Rajiv Biswas, the firm’s chief regional economist in Singapore.

Biswas worries about the danger of a government debt crisis down the road in Japan and is keeping an eye on risks in China from fast-growing shadow banking and the property market.

But everything is relative. “When you meet someone coming from Europe, they can hardly believe that there’s a part of the world that’s doing so well by comparison with them,” Biswas said.

(editing by Ron Askew)

The authorities had decided where they would relocate the mainly Portuguese-speaking immigrants and Roma from their plywood and corrugated iron shacks that disfigure the fringes of one of south Lisbon’s smartest beach resorts.

And then the financial crisis struck.

Five years on, as Portugal slashes its budget to please international lenders that provided a 78 billion euro bailout in 2011, there are no longer any public funds to erase the scar of shanties that would not look out of place in Mumbai or Soweto.

“Right now the state has no money to move people from here, but they should at least provide us with minimum conditions,” said Euclides Fernandes, 33. The slums have no legal electricity, no sewerage and no running water.

“The emergency in the neighborhood is water,” said Fernandes, who lost his construction job when the sector slumped. “With unemployment everything gets worse. We’re feeling it. Families who were paying rent and now don’t have an income are coming back here.”

The poverty of Terras do Lelo may be extreme, but the one-two punch of budget austerity and recession is being felt across Portugal, a nation of 10.6 million.

Tiago Saraiva with the Lisbon architectural practice Ateliermob, which is working to improve conditions in the slums, says teachers at his daughter’s school have to pay out of their own pockets to photocopy exam papers.

LOOKING FOR CUTS

More cuts are baked in the cake: the government is scrambling to come up with 1.3 billion euros in savings, amounting to 0.8 percent of GDP, after the constitutional court last week rejected plans to reduce public workers’ benefits.

The finance ministry responded with a freeze on non-essential spending, generating front-page headlines on Thursday that everything from school lunches to police patrols and health inspections were being curtailed.

Under orders from its troika of lenders – the International Monetary Fund, the European Union and the European Central Bank – Portugal has to make 4 billion euros in permanent savings between 2013 and 2015.

What was already a huge task for Prime Minister Pedro Passos Coelho is now even more complicated due to the court’s ruling that measures singling out civil servants are unfair.

“The cuts have to be done. It will not be easy. The job will have to be thorough and well thought-out,” said Rui Constantino, an economist at Santander in Lisbon.

The public sector wage bill and pensions make up 60 percent of state spending, but analysts expect the government to find cuts that pass muster with the court by taking the axe to areas such as health and education.

The question for the government – and for financial markets, which have so far taken the court ruling in their stride – is how the next slug of spending cuts will be judged in the court of public opinion.

Hundreds of thousands of Portuguese have taken part in two anti-austerity protests in recent months. The demonstrations were peaceful but the message was clear: people are getting fed up with ever-rising unemployment – 16.9 percent last quarter – and never-ending cutbacks.

“The country is in chaos. It has hit rock bottom. There is little the people can do,” said pensioner Manuela Ferreira, 67.

The consensus among political analysts in Lisbon is that Coelho, who survived a no-confidence motion last week, will soldier on. But his room for maneuver is shrinking.

Jose Augusto Silva, 64, head of a neighborhood association in northeast Lisbon, wishes his countrymen had more of a “culture of action” rather than passively accepting their fate.

“The situation is very hard. There are many pensioners on 200-odd euros a month here and now their children and grandchildren are unemployed and come and ask their grandparents for money,” he said.

Like many people in bailed-out countries on the euro zone periphery, Silva is critical of euro zone paymaster Germany for the harsh terms of Portugal’s bailout.

“Germany ended up beating us not by war but by the force of money,” Silva said.

HOSTAGE TO FORTUNE

At a meeting in Dublin starting on Friday, euro zone finance ministers are likely to agree in principle to give Portugal – and Ireland – more time to repay loans from Europe’s bail-out funds.

Stretching out loan repayments will help in the medium term but will not address the immediate imperative of growth.

The economy shrank 3.2 percent in 2012 and the troika has penciled in a further contraction of 2.3 percent this year.

Portugal hopes to regain full bond market access this year. But the unarticulated fear is that, without a return to vigorous growth, investors will baulk at the prospect that Portugal’s debt, already 123 percent of GDP, will fail to stabilize.

Investment has fallen about 40 percent from its pre-crisis peak, while banks and households are paying down debt. With the public sector shrinking, the only bright spot has been exports.

Companies have done better than expected to diversify away from their home market, but exports need to be an ever-bigger driver of the economy, said Kathrin Muehlbronner, who covers Portugal for Moody’s Investors Service.

Yet here too, Portugal is not master of its own fate.

“The export sector has to be the anchor to start a recovery, but for that you need a recovery in the wider euro zone and the global economy. That’s very clear,” she said.

Back in the waterless slums of Terras do Lelo, things are not looking up for Miguel Bemba da Silva. “We don’t have work. Life is bad,” the 43-year-old Zairean said.

Except da Silva does have work of sorts. He earns a few euros for hauling plastic jerrycans of water from a public fountain half a kilometer away.

“Water is what we miss,” he said. “It’s better to do this than going around thieving.”

(Additional reporting by Sergio Goncalves; editing by Janet McBride)