MacroScope

One of two stories will probably emerge from Friday’s first reading on how the British economy fared at the end of last year.

If it shrank 0.1 percent in the fourth quarter as the consensus of economists polled by Reuters expects, or worse, we will hear it raises the disastrous spectre of a third recession in four years, or a “triple-dip”.

If it defies expectations by growing slightly, that risk is averted and the government will say it shows the economy is getting back on its feet.

While both stories have profound political implications, in economic terms they are really aspects of the same thing: Britain’s economy has been drifting around the margins of mediocrity for the last few years, and will probably do so for years to come.

Stephen Lewis, chief economist at Monument Securities, offered this wider view of Britain’s economy in Wednesday’s Reuters poll:

David Levy says he is bullish on the U.S. economy long term. But for now, the country is effectively stuck in a “contained depression,” the chairman of the Jerome Levy Forecasting Center told Reuters during a recent visit to our Washington bureau.

Still, things could have been much worse, says the third generation economist. For Levy, the interventions of a large and proactive federal government prevented a repeat of the 1930s.

In this corrective process, the reason we haven’t had a collapse in profits as we had in the Great Depression is we have – what nobody seems to like very much – a big government that’s stabilizing it by just simply running these deficits and being a much more active lender of last resort.

Federal Reserve Chairman Ben Bernanke’s verdict on the U.S. economy is sobering. Boiled down, this was the message delivered at his news conference today:

Brace for roughly three more years of sluggish growth – or longer Some of the unemployed will not find work in the foreseeable future America’s economic power has downshifted Global financial markets could upend recovery yet again

It is a bleak outlook. Bernanke has left little doubt that he sees the United States in the midst of very long and painful period of sub-par growth, dousing some of the optimism stirred by recent reports that showed unemployment falling, the housing market hitting bottom and businesses starting to spend again.

Conditions could worsen, especially if the European crisis deepens and tips the world back into recession as the IMF warned this week. Bernanke said the central bank is ready to pump even more cash into the economy to keep it afloat if necessary. And by formally announcing for the first time that the central bank has inflation target of keeping prices at 2 percent, Bernanke has bought himself the leeway to provide extra support to growth without stoking inflationary fears.

Many happy returns or midlife crisis?

The annual talkfest in the Alps records its 40th birthday this year but the rich and powerful will hardly be in celebratory mood as problems pile up in the post-crisis world.

How to withdraw the trillions of dollars in stimulus that helped the world avoid a rerun of the Great Depression, without spooking markets all over again?

What to do in the face of the world's lukewarm response to the hot topic of climate change?

Investor sentiment goes through various phases in an economic cycle — from optimism, euphoria to panic and depression, back to hope and optimism.

James Thomson, investment manager of Rathbones global opportunities fund, discusses the current stage of investor morale.

It may be some weeks since investors have written off the prospect of a V-shaped economic recovery, but equity analysts still expect corporate earnings to go through a very sharp V-shaped rebound.

According to Thomson Reuters data, earnings are expected to shrink 34.5 percent in Q2 and 21.4 percent in Q3, before growing a whopping 180.2 percent in Q4.

That would bring the full-year 2008 earnings contraction rate to just 11.2 percent.

Stopping off in New York during a marathon, 18,000-mile diplomatic offensive before next week’s G20 summit in London next week, British Prime Minister Gordon Brown recalled a conference held in eerily similar circumstances in London 76 years ago.

Sixty-six nations gathered for the June 1933 London Monetary and Economic Conference which was aimed at lifting the world’s economy out of the Depression.

But amid American opposition to European plans to return to a system of fixed exchange rates, the conference collapsed and the world put up trade barriers, jobless ranks swelled and the rise of Fascism took the world into war.

Merrill Lynch economist David Rosenberg’s views are well-known for bearing no resemblance to his firm’s trademark bull, so when he says European clients seem too upbeat, what he really means is they weren’t thoroughly depressed. The New York-based economist just got back from a marketing trip across the Atlantic and didn’t find much common ground.

In particular, he said European clients seemed more concerned about inflation than the deflation that he sees coming, and they may have unrealistically high expectations for President Barack Obama.

“Unbelievably … portfolio managers seem to think they are taking a bigger risk with their careers by missing the rallies than by missing the sell-offs,” he wrote in a note to clients. “I can tell you that this is not a condition from a sentiment standpoint that terminates bear markets.”

America caught a cold and now China has one too. 

IMF chief Dominique Strauss-Kahn said on Monday that the Fund could cut its forecast for China's economic growth in 2009 to around  5 percent. To think that only last year China was galloping at a double-digit clip. It's staggering, and it's worrying.

Worrying, for one thing, because  - as the Heritage Foundation's Derek Scissors puts it - "the American economic slump is running into the Chinese economic slump, creating the conditions for a face-off between Beijing and the U.S. Congress, possibly leading to destabilization of the world's most important bilateral economic relationship". 

He argues that the new U.S. administration, confronted with a record-breaking bilateral deficit and soaring unemployment, could impose prohibitive tariffs or erect other barriers to Chinese goods. The EU, Japan and others would then be permitted by WTO rules to raise barriers against a diversion of Chinese goods to protect their markets, and "some form of Chinese retaliation is certain".