'World pulling out of recession'

WYOMING - Central bankers from around the world are increasingly confident the worst of the global financial crisis has passed and that recovery is beginning to take shape.

Federal Reserve Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet said the world economy was pulling out of its deepest recession since the 1930s.

Prospects for a return to growth in the near term "appear good", while "critical challenges remain", including possible further losses for financial firms, Bernanke said.

Trichet said "green shoots" weren't enough for him to declare the recovery sustainable but "we see some signs confirming that the real economy is starting to get out of the period of free fall".

The mixed outlook was one of the main themes struck on the first day of the annual central bankers' symposium in Jackson Hole, Wyoming, hosted by the Kansas City Fed bank.

Policy makers , including New Zealand Reserve Bank Governor Alan Bollard, and economists from South Africa to Mexico dissected the causes of the financial crisis and debated how to prevent or mitigate the next one.

The atmosphere is a sharp contrast to that at the retreat a year ago when there was a sense the world was on the edge of an economic abyss.

From around the world last week economic reports showed strong signals of a rebound in the United States, Germany and France. US purchases of previously owned homes climbed 7.2 per cent in July to the highest level in almost two years, indicating the housing crisis that crippled the world's largest economy is easing.

United States stocks gained for a fourth day, with the Standard and Poor's 500 Index rising 1.9 per cent in New York to the highest level since October. Benchmark 10-year notes yielded 3.57 per cent, up 13 basis points from August 20.

Following data showing the euro-area's two largest economies pulled out of a recession in the second quarter, Markit Economics reported on Friday that German services expanded this month for the first time since September. Its gauge for French manufacturing rose to its highest in 15 months.

"There is a sense here that things have stabilised since the panic," said John Taylor, a former US Treasury official and now a professor at Stanford University in California, who attended the symposium. "But things still look pretty flat and nobody is saying there is going to be a sharp rebound."

Bernanke opened the formal part of the conference yesterday with a speech defending the Fed's responses to the crisis over the past year and those of counterparts around the world. A "strong and unprecedented international policy response" averted "the imminent collapse of the global financial system", Bernanke said.

Even with the economy on the mend, Bernanke said "strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit." Recovery "is likely to be relatively slow at first, with unemployment declining only gradually from high levels".

Bernanke's note of caution underscored the Fed's decision last week to leave interest rates near zero for an "extended period" and to delay by a month the scheduled end to its $300 billion ($443 billion) programme to buy US Treasuries.

While economists predict the US will return to growth this year, they say the jobless rate is likely to rise beyond 10 per cent, restraining consumer spending and casting a cloud over the strength of the recovery.

Trichet said: "I am a little bit uneasy when I see that because we have some green shoots here and there, we are already saying, 'Well, after all, we are close to back to normal.' We know that we have an enormous amount of work to do and we should be as active as possible."

Bundesbank President Axel Weber told the gathering that it's "too early to say it won't be a bumpy road ahead".

The Organisation for Economic Cooperation and Development will next month upgrade its outlook for the economy of its 30 nations, which includes the US and Japan, Secretary General Angel Gurria said. The group said in June that the combined economy of the world's most-industrialised countries will shrink 4.1 per cent this year and grow 0.7 per cent in 2010.

"We're confirming a positive trend but are still cautious," Gurria said. "There are risks that are important."

In New Zealand some economists say the economy is already experiencing weak growth in the current quarter.

WHAT THEY SAY

"Prospects for a return to growth in the near term appear good - critical challenges remain."
Ben Bernanke

"We see some signs confirming that the real economy is starting to get out of the period of free fall."
Jean-Claude Trichet

- BLOOMBERG