Government aid a hard habit to break

WASHINGTON (Reuters) - The global recovery may be losing some momentum, making it harder for governments to wean their economies off public money.

In the United States, the euro zone and Canada, unemployment figures last week showed businesses were in no hurry to resume hiring, even though economic growth has resumed. This may be a signal that companies have their doubts about whether the recovery can be sustained once government supports fade away.

In order for that to happen, consumers and companies will have to show a willingness to spend and invest -- without added sweeteners such as stimulus money or tax breaks.

If recent trends are any indication, a stimulant-free economy might struggle.

U.S. and European government incentives to spur new car purchases sparked a revival in auto manufacturing that ultimately proved fleeting because demand faded once the incentives dried up. U.S. data shows auto-related jobs picked up in October but then declined in November and December.

Howard Archer, chief European economist with IHS Global Insight in London, said that underscores the danger in pulling the plug on public spending too quickly, and the euro zone’s economy may falter in 2010.

“The likely fragility of the recovery means that both governments and the European Central Bank need to be wary about withdrawing stimulus measures too soon or too aggressively,” Archer said.

The ECB holds its next policy-setting meeting on Thursday, and economists polled by Reuters think it will hold interest rates steady at 1 percent. Archer thinks the ECB will remain on hold until at least late 2010.

Jobs typically remain scarce well after economies begin to pull out of recessions, so the weak labor market is not entirely shocking. However, it puts a damper on consumer confidence and spending, and increases pressure on politicians to do all they can to encourage hiring.

Figures due on Thursday should provide some insight into how the stubbornly high unemployment affected shopping during the holiday season. Economists polled by Reuters think U.S. retail sales rose 0.4 percent in December, which would be more modest than the 1.3 percent rise seen in the prior month.

British retail sales data is expected on Tuesday.


Whether consumers and companies are ready to pick up the slack or not, governments and central banks around the world are beginning to extricate themselves from emergency lending and spending programs.

The Bank of England will decide in February whether to extend its asset-buying program. Many economists think the BOE will hold off on announcing any more purchases for now. The U.S. Federal Reserve is set to complete its purchases of mortgage-related assets this spring.

Some of the leading emerging markets, such as China, are also taking modest initial steps toward tightening policy, reflecting a growing concern about rising asset prices and inflationary pressures.

As these publicly funded programs wind down, longer term interest rates on government debt and mortgages are likely to rise, even if central banks keep official short-term borrowing costs at or near record lows.

That in turn could stall the recovery in the U.S. housing market, which was at the root of the global recession, and make it harder for companies to finance the growth necessary for improved hiring.

Sung Won Sohn, an economist at California State University, thinks all of these factors add up to a recipe for another potential economic setback.

“There is a growing concern about a double-dip recession,” he said. “Toward the end of 2010, the bulk of the money from the economic stimulus program will be gone. The Federal Reserve will have embarked on an exit strategy and start hiking the interest rate by then. Consumers are not likely to go on a spending spree any time soon. Even if they were willing to spend, credit won’t be available to support spending.”

Editing by Dan Grebler and Diane Craft