By Emily Kaiser
WASHINGTON, May 17 (Reuters) - Governments are spending piles of money, consumers are creeping out of their cocoons, and companies are clearing stockpiles of goods, which all lays the groundwork for economic recovery.
Whether the recovery will be sustainable is a trickier question.
By just about any measure, the first quarter of this year was disastrous for the world's major economies. U.S. and euro-zone gross domestic product shrank more than expected, the latter dragged down by Germany's record-large 3.8 percent contraction.
Japan's first-quarter GDP report is due on Tuesday, and economists polled by Reuters expect a 4.2 percent drop from the previous quarter.
But economists are growing increasingly confident that this will be as bad as it gets for the current recession.
The first and biggest reason is money. Japan is pouring $154 billion in stimulus into its economy, which is equal to 3.1 percent of GDP. China's $586 billion in stimulus works out to 13.3 percent of 2008 GDP. The U.S. package of $787 billion is equal to 5.5 percent of its GDP, or about twice the economy's trend growth rate.
To be sure, those totals are spread over more than one year, but already there is evidence that the money is beginning to work its way through the economy and disperse the gloom.
Torsten Slok, a senior economist at Deutsche Bank in New York, said that since the U.S. stimulus package was the equivalent of pouring two years' worth of economic growth into the economy, it must surely provide a substantial lift.
"Very little of that has been paid out so far and still we are seeing green shoots" of economic recovery, he said. "If you are seeing green shoots, and on top of that you come with a humongous amount of fertilizer, that must imply that we will see some blossoming in the economy."
Those blossoms are already visible in China in the form of a rebound in manufacturing and consumer spending. Slok and others think the U.S. economy will resume growth in the second half of this year. Europe's recovery may be a quarter or two slower, but it does appear to be on track.
NO ARMAGEDDON
Ethan Harris, an economist with Barclays Capital in New York, said policy efforts deserve credit for curbing the recession and restoring some confidence to financial markets after 20 months of turmoil.
"It seems to have triggered a positive feedback loop between the capital markets and the economy," he said. "Just by convincing the markets that there will not be an Armageddon, policy-makers are starting to succeed."
Consumer confidence also appears to be on the mend. The closely watched Reuters/University of Michigan survey of U.S. consumers released on Friday showed confidence at its highest mark since September, when the collapse of Lehman Brothers touched off a deep, synchronized global economic slump.
More-confident consumers are more willing to spend money, and that is essential to a consumption-driven global economy. Companies have aggressively slashed inventories, which was a big reason behind the severe first-quarter drop in GDP. As demand returns, businesses will need to ramp up production and hiring, which will make the economy grow.
"We have definitely laid the groundwork for recovery and things are looking better in the next few quarters," Deutsche Bank's Slok said. "The new worry that more people are asking about is, what about when we get into 2010?"
Slok said the answer to that depends on what happens to the U.S. housing market and the banking sector. If both are healing, the outlook becomes much brighter.
U.S. housing starts in April, scheduled for release on Tuesday, are expected to rise nearly 2 percent, to a 530,000 unit annual rate, while permits to build new homes are expected to increase 2.7 percent to a 530,000 unit rate. However, both rates still very low by historical standards.
Politics and policy, particularly in the United States, will also play a role.
John Silvia, chief economist at Wachovia in Charlotte, North Carolina, said his concerns for 2010 include tighter regulation of financial markets and players, higher taxes, and what happens when the Federal Reserve decides to reverse course and tighten monetary policy.
"You could easily snap this nascent recovery," he said. "The challenge is the exit strategy. How are you actually going to get out of this without keeping the stimulus in place for a long time? I think the risk is that you do get a little bit more inflation than you anticipated." (Editing by Neil Stempleman)