* World economic growth on divergent paths
* Steady growth in Asia, slow in U.S.; euro zone sinks
* Confidence slumps but economic activity improves
* Financial contagion remains a serious risk
By Stella Dawson
WASHINGTON, Nov 7 Europe is the largest trading
partner for the United States and for China, and its financial
system is deeply interwoven with world finance. Until euro-zone
leaders draw a line under their debt crisis, risks of upheaval
spreading through the global economy will remain high.
So far, the United States and China have shown a welcome
resilience to turmoil from Europe, revealing a disconnect
between sentiment and what is happening in the real economy.
The United States has seen a slow but steady improvement in
its labor market. It has added 367,000 jobs in the private
sector over the last three months, a slightly faster pace than
the 301,000 gain in the May-July period and enough to lower the
unemployment rate a notch to 9 percent, a six-month low.
Factory workers put in longer hours last month and incomes
edged upward, which will support retail spending in the months
ahead. Capital spending by U.S. businesses also is surging and
productivity ticked upward in the third quarter as labor costs
"I think it's a sign of a more robust economy than we've
been giving it credit for. Some of the underlying fundamentals
are fairly strong," said Karl Schamotta, senior strategist at
Western Union Business Solutions. "It's not a fantastic
recovery, but it's good given what's going on globally."
The improvements in the U.S. outlook come even as Europe
slides into recession, political upheaval in Greece and Italy
stymie their reform efforts and uncertainty remains over
exactly how euro-zone leaders will structure a bailout plan.
Stock markets worldwide slumped again in the past week,
adding to steep third-quarter losses. Investors found no
comfort in a G20 summit where leaders of the world's largest
economies delivered a statement of growth principles but failed
to put to rest concerns over containing Europe's debt crisis.
Nervousness that financial contagion could spread from
Europe through the banking system is likely to continue
weighing on asset prices, feeding into already depressed
business and consumer sentiment.
Usually when confidence is shaken for months on end, it
undermines economic growth. The Reuters/University of Michigan
sentiment survey is stuck at low levels and is expected to
remain there, at 60.9, when the latest data is released on
Yet businesses continue investing and consumers have begun
replacing goods. Nigel Gault, U.S. economist at IHS Global
Insight, said pent-up demand among the better-off U.S.
consumers, who have jobs and retain positive equity in their
homes, is helping insulate the United States from damage from
Even if U.S. trade data due on Thursday shows exports to
Europe slumping, Gault said it would shave only about
six-tenths of a percentage point from overall U.S. growth --
not enough to tip an economy now growing at a 2 to 3 percent
annual rate back into recession. September numbers are expected
to show the U.S. trade deficit widened to $46.0 billion from
ASIA HOLDS UP
China likewise would not necessarily be doomed if Europe
slips into a recession, although it is certainly feeling the
A government report last week showed the manufacturing
sector weakened in October and new export orders contracted.
Data on Thursday is expected to show October exports rose 16.5
percent from a year earlier, which would be somewhat slower
than September's 17.1 percent rise.
South Korea provided an early glimpse into how Asia's
exporters fared in October. Its shipments to Europe tumbled 20
percent from a year earlier in the Oct. 1-20 period.
The last time China's European exports recorded a
year-on-year decline was in February, which is typically a slow
month because of the Chinese New Year celebration.
But trade is not China's sole economic growth engine. In
fact, exports subtracted from China's gross domestic product
over the first three quarters of 2011.
"China is modernizing. Forty percent of China's GDP growth
is from consumption and that will increase; 40 percent is from
investment in plant and equipment. It is becoming a
self-sustaining process and China can sell right through this,"
said Carl Weinberg, chief economist at High Frequency
Additionally, China, unlike most advanced economies, has
room to ramp up government spending or ease credit conditions
if its outlook worsens. Inflation pressures are easing, which
should give the People's Bank of China more maneuvering room.
Data on Wednesday is expected to show the consumer price
index rose 5.5 percent in October from a year earlier,
moderating from September's 6.1 percent annual increase.
That would still leave inflation well above Beijing's 4
percent target, which suggests interest rate cuts are unlikely.
But China's leaders have been dropping hints that they will
selectively ease credit conditions, particularly for small- and
mid-sized companies that have had trouble borrowing.
Absent the wild card of a bank failure in Europe that
unleashes fresh financial contagion, it points to a world
economy on divergent paths: Slow growth in the United States,
steady growth in Asia and Europe sinking.