* Economies in Europe, Britain over the worst
* U.S. set to do better once fiscal drag fades
* Asia resilient in face of capital outflows
By Alan Wheatley, Global Economic Correspondent
LONDON, June 23 Markets dismayed by the Federal
Reserve's stimulus withdrawal timetable might be in no mood for
good news, but evidence is mounting that other rich economies
are joining the United States on the road to recovery.
Improving growth prospects, of course, are the main reason
why the Fed expects to phase out its bond purchases, now running
at $85 billion a month, by the middle of 2014. The U.S. central
bank reckons output will expand by 3.25 percent next year.
The euro zone, too, seems to be stabilising after 18 months
of recession as fiscal headwinds blow a little less fiercely,
while economists are upgrading their growth forecasts for
Britain as household incomes improve.
Japan has already discovered a new lease on life thanks to
aggressive monetary and fiscal stimulus.
"There are pretty clear signs of an improvement in
developed-world final domestic demand," said Daniel McCormack, a
strategist with Macquarie in London.
He said Europe was clearly over the worst, with even heavily
indebted countries on the rim of the euro zone, such as Spain,
finding a floor.
The modestly brighter outlook will be reflected in euro zone
business and consumer sentiment figures on Thursday, according
to economists polled by Reuters. Germany's IFO business climate
index, due on Monday, is also expected to have edged higher.
FED WIPES AWAY THE FROTH
In the United States, new and pending home sales are likely
to confirm the upswing in housing that is keeping the economy on
a moderate expansion track despite a combination of tax rises
and spending cuts this year equal to about 1.8 percent of GDP.
Larry Kantor, global head of research for Barclays based in
New York, said this fiscal drag would limit growth to an annual
pace of 1.5 percent this quarter and 2.0 percent next quarter.
But no further fiscal tightening is programmed for 2014, a
year when interest rates will still be at zero, the housing
recovery will still be under way and consumers will be enjoying
the lagged wealth effect of higher share and house prices.
"If we don't get, in 2014, significantly better growth in
the U.S. we're never going to get it," Kantor said at a news
briefing in London. "You've got all these forces aligned for
stronger growth next year."
The violent sell-off in bonds and shares since last
Wednesday's Federal Open Market Committee meeting shows the
market had not expected Bernanke to set forth such an explicit
calendar for phasing out the Fed's asset purchases.
The volatility was unlikely to abate right away and Fed
officials were nervous about how the 'tapering' process would
unfold, according to Kantor, a former Fed staffer himself.
But he said Bernanke was right to re-inject two-way risk
into asset markets, whose powerful, sustained rally had
threatened a replay of recent boom-and-bust cycles in dotcom
shares and housing.
"The Fed wants to take some froth out of the markets and,
given the experience we've had with asset prices, this is
actually healthy," Kantor said. "A lot of FOMC members had seen
this movie before."
Emerging markets have borne the brunt of the sell-off as
investors dump higher-yielding bonds and shares bought with
cheap borrowed dollars.
But Rob Subbaraman, chief economist for Asia ex-Japan for
Nomura in Hong Kong, said he was not downgrading his forecasts
despite the exodus of capital. Except for China, growth was
likely to accelerate across Asia in the second half of 2013.
Despite the Chinese slowdown, Asian export prospects looked
brighter as global demand was poised to improve and central
banks had let their trade-weighted exchange rates weaken,
Subbaraman said. What's more, lower commodity prices and loose
policy settings were supporting domestic demand.
"So Asian growth will hold up pretty well. When the dust
settles and people realise that the Fed isn't about to
aggressively tighten policy, I think capital will come back to
Asia," Subbaraman said.