World economy shows mixed signals on recovery

LONDON/NEW YORK (Reuters) - Data released on Thursday showing U.S. economic growth shrank a bit less than expected early this year helped offset news of higher U.S. jobless claims and slumping euro zone industrial orders.

U.S. stocks recovered from an early drop, while European markets were down, reflecting the weakness in euro zone industry and surprise that weekly U.S. jobless claims rose by 15,000 last week when analysts had expected a drop of 8,000.

"This will send a message that the labor market remains difficult and that it'll be a while until we get some recovery," Peter Boockvar, equity strategist with Miller Tabak & Co in New York, said of the government jobless claims data.

In Washington, Federal Reserve Chairman Ben Bernanke told lawmakers he did not threaten Bank of America (BAC.N) executives if they stood in the way of the government-pushed merger with Merrill Lynch.

U.S. gross domestic product -- which measures total output within U.S. borders -- dropped at a 5.5 percent annual rate in the first quarter, a bit less than first reported, after shrinking 6.3 percent the previous quarter.

Although economists had expected worse, the data showed widespread weakness in the world's biggest economy.

Adding to market uncertainty, the Fed -- the U.S. central bank -- cautioned Wednesday after a two-day policy meeting that the U.S. economy would remain weak for a time although the pace of contraction was slowing.

It kept benchmark interest rates near zero and stuck to, but did not increase, its huge program of buying government and mortgage debt to help ease a protracted financial crisis.

In Europe, however, new industrial orders in the euro zone were unequivocally weak, plunging more than a third year on year in April, a record decline that disappointed those who had seen hopes in March's figures that the worst was over.

"If you play the 'green shoot' game, it is better to avoid the hard data," ING economist Martin van Vliet said of recent talk of 'green shoots' of recovery from the global recession.

In Germany, construction orders rose 6.3 percent in April from March, the biggest increase in nine months. Orders were down 9.1 percent from a year ago, however, but the global downturn has been so great that comfort is now taken in slowing rates of decline, given a lack of any growth.

In France, Economy Minster Christine Lagarde said unemployment data for May, due later in the day, would be "a little better" than in previous months, and in Italy business confidence rose for a third straight month, but a little less than economists had forecast.

ASIAN ECONOMIC STRAIN

South Korea upgraded its 2009 growth forecast on Thursday, saying Asia's fourth-largest economy was expected to contract 1.5 percent compared with a previous forecast of 2 percent.

That would still mark the worst performance since 1998, when the economy shrank 6.9 percent as the Asian financial crisis pushed South Korea to the brink of sovereign insolvency.

In China, an official at the State Administration of Foreign Exchange said the country had begun to see capital inflows after heavy outflows for two quarters.

Among corporations kicking off a closely watched second-quarter earnings season, H&M (HMb.ST), the world's third-biggest clothing retailer, posted a rise in profits but qualified it with flat sales for May.

Toyota Motor Corp (7203.T), the world's No.1 car maker, also dimmed the outlook with a prediction of tough times for another two years and that it would continue to cut costs from its already lean operations so it could avoid a third consecutive year of losses.

The fragility of any recovery was underlined by global airlines body IATA, which said demand for cross-border air freight dropped 17.4 percent year-on-year in May, suggesting international trade is still far from healthy.

Stock markets were mixed, with the U.S. Dow Jones industrial average .DJI up 1.9 percent and Europe's FTSEurofirst 300 index .FTEU3 down 1 percent. Emerging stocks .MSCIEF rose almost 1 percent, and Japan's Nikkei .N225 ended up nearly 2.2 percent.

"For now the hope is that we are still likely to be coming out of the recession sometime in the third quarter," said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut.

"Stocks tend to react months before that, and even when the growth starts, usually stocks support pretty decent gains three months after the recession ends."

(Reporting by Reuters bureaux globally; Editing by James Dalgleish)