* ECB could cut main interest rate as soon as this week
* China's PMI to show growth shifting to lower gear
* Fed firmly on hold as U.S. job growth stays below trend
By Alan Wheatley, Global Economics Correspondent
LONDON, April 28 Five years after the onset of
the global financial crisis, the world economy is in such a
chronic condition that the European Central Bank might cut
interest rates this week and the Federal Reserve is likely to
indicate no let-up in the stimulus it is providing the U.S.
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
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
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
"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.