Growth slows, markets feeling good ahead of Davos

Sunday - 1/20/2013, 6:59am EST

By DAVID McHUGH
AP Business Writer

FRANKFURT, Germany (AP) - The world's financial and political elite will head this week to the Alps for 2013's gathering of the World Economic Forum in Davos, Switzerland, with the global economy far less plagued by fear than it was last year.

Much-feared worldwide panics from a collapse of the euro currency union have been avoided. China appears likely to remain an engine of global growth. Stocks are off to a running start in the New Year.

"There's a sense of relief that the worst didn't happen ... and I think that relief is probably justified," said Nariman Behravesh, chief economist at IHS Global Insight.

Davos is the venue for the World Economic Forum, an annual gathering of more than 2,000 decision-makers from nearly 100 countries and hundreds of companies that starts Wednesday. The WEF has taken "Resilient Dynamism" as the theme for this year's event.

Yet the global economy is expected to remain sluggish in 2013, with two of the biggest economies _ the euro alliance and Japan _ in recession. There's also a risk that the United States, the world's largest economy, may slash government spending _ a step that could dampen the world economy. Few think global economic growth will even match last year's tepid 3.3 percent.

Despite that, as fear of a catastrophe has eased, optimism appears to have taken hold among investors. The world's financial markets have surged. Both the U.S. Standard & Poor's 500 and Europe's STOXX 600 have risen 13.5 percent in the past 12 months.

Fueling much of the improvement has been a flood of monetary expansion from the world's central banks. The U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank have purchased financial assets such as bonds with newly created money. The central banks have also slashed short-term interest rates to record lows _ to near zero in the case of the Fed. The ECB has lent more than (EURO)1 trillion to banks at low rates.

The European Central Bank gave the eurozone its biggest boost when it offered last fall to buy unlimited debt of heavily indebted countries such as Spain and Italy. That action lowered their borrowing costs and eased fears that those governments would default.

Fears that the group of 17 European countries that use the euro would break up under the weight of its debt crisis faded throughout 2012. One factor bolstering the eurozone was the deal struck between Europe and the International Monetary Fund to stop Greece from being forced to default on its debts and abandon the euro.

As interest rates have dropped, investors have shifted money into stocks, real estate and other assets, driving up their prices. One of the biggest market jumps in 2012 came in Greece's own Athens stock exchange, where stocks catapulted 33 percent. Even the yields on bonds sold by U.S. companies with subpar credit ratings _ so-called junk bonds _ have fallen.

Some pillars of the U.S. economy, like the housing, banking and auto sectors, have been gradually yet steadily recovering from the American recession, which officially ended 3 1/2 years ago. And relief was widely felt at the end of 2012, when President Barack Obama and the U.S. Congress cut a deal on tax rates and delayed the "fiscal cliff" of automatic cuts and tax increases.

Worries that China, the world's No. 2 economy, would suffer a sudden slowdown proved unfounded as the country's new Communist leadership appeared to signal its commitment to growth policies. Its leaders are trying to reduce China's reliance on exports by encouraging Chinese consumers to spend more at home.

Analysts caution that the still-sluggish global economy has little room for error.

IHS Global Insight predicts the worldwide economy will expand just 2.5 percent in 2013, even less than last year's estimated 2.6 percent. In the United States, unemployment remains elevated at 7.8 percent. U.S. employers have held back on hiring and pay raises.

"There's lots of potential bad macroeconomic news," said Rabobank analyst Jane Foley. "And yet market sentiment seems to be very gung-ho."

Among the risk factors analysts cite:

_The heavy government debt loads in the eurozone, the chief concern from 2012, remain in place. Many worry that European leaders, facing citizen anger over government spending cuts in the midst of recession, will be reluctant to reduce debt and strengthen oversight of their banking system.

_A dispute in the United States over raising the government's debt ceiling, and dealing with automatic spending cuts, has only been postponed until early March. Even if the ceiling is raised, Republicans in the U.S. Congress will likely demand deep spending cuts as a price for voting to raise it. If U.S. government spending were slashed in the short run, it could slow the global economy.