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Eyes turn to ECB, G20 for response to crisis

Sprinklings of positive data suggested the first pieces of a recovery puzzle may be fitting together for the global economy as investors looked to the European Central Bank and the G20 summit for the next response to the financial crisis.

But the mood fell short of outright optimism, especially in Europe where the leaders of the world's richest and biggest developing economies were to meet on Thursday to address the worst downturn since the 1930s amid signs of division between the United States and a French and German bloc.

The immediate focus in Europe was on whether the European Central Bank (ECB) would cut interest rates again or if its policymakers would follow US and British counterparts into quantitative easing, effectively printing more money to spur economic growth.

A Reuters poll of analysts found most saw the ECB cutting its rates by another 50 basis points to a record low of 1.0%, hoping to draw funding into banks, and trimming its overnight deposit rate by 25 points to just 0.25%.

The quantitative easing argument was harder to pin down, with a vast expansion of its balance sheet to buy government bonds harder to do in the 16-country euro zone than in a single national context.

As the G20 leaders gathered in London, there were plenty of signs of how bad the global crisis had become, and growing debate over whether the worst of the downturn has passed.

The Organisation for Economic Cooperation and Development said unemployment in the euro zone jumped 8.5% in February and warned it could reach 12% in 2010.

US private sector job losses also accelerated more than expected in March, while in Japan a key survey on Wednesday showed business confidence had hit an all-time low in the world's second-largest economy.

The International Monetary Fund predicted the global economy could contract by between 0.5% and 1% this year, but even then there was some glimmer of hope.

IMF Managing Director Dominique Strauss-Kahn and the Federal Reserve's Sandra Pianalto both saw signs of growth in 2010.

“I expect economic conditions to stabilize by the end of the year and then begin to recover next year as the fiscal stimulus boosts spending and as we work off excess inventories,” Pianalto, the Cleveland Fed president, said in a speech in Ohio.

Data on Wednesday showed US, euro zone and British manufacturing had inched away from February's lows, even though they remained negative.

A US index of pending home sales rose more than expected, and auto sales, while weak, were not as bad as expected, all of which hinted at improvement.

“There are a few spots where we can have hope,” said Juergen Michels, an economist at Citigroup in London.

Asian stocks climbed on hopes the US economy had bottomed out. If recession-weary US consumers and companies do not start spending again, a global recovery is unlikely.

Japan's Nikkei share average rose 3%, driven up by a 5% rise in top bank Mitsubishi UFJ Financial Group on growing signs that the global financial system is stabilizing.

Asian stocks outside Japan were up for a third straight day, rising 3.6%.

Hopes for an orderly end to US automaker General Motors' troubles also pushed up Asian rivals. Honda Motor Co shares rose 9% and Hyundai Motor was up 5%. While the news about GM and smaller rival Chrysler has been almost universally bleak since US President Barack Obama rejected their restructuring plans on Monday, US auto sales in March contained a glimmer of hope.

Although down 37% in March, their 17th straight month of declines, sales in the world's largest car market had at least not been as bad as expected.

There were also positive signs in Australia, where resilient resources exports helped to more than double the trade surplus in February to $1.5 billion.

“The basic stuff that Australia exports is perhaps not as vulnerable as the sort of discretionary goods like cars and computers that Japan or Korea produces,” said Brian Redican, a senior economist at Macquarie.

South Korea provided another piece in the recovery puzzle. Exports and factory production figures raised hopes the economy was approaching bottom, although a senior finance ministry official said there were no plans to change its forecast for the economy to shrink 2% this year.

South Korea's foreign reserves also rose in March by the biggest amount in three years because of the US dollar's global weakness, the central bank said.

Obama said on the eve of the G20 summit there was “enormous consensus” among leaders on their approach to the crisis despite a combative tone set by French President Nicolas Sarkozy, who said he would not back “false compromises.”

Obama wants governments to pump more money into economic stimulus programs in order to turn things around, while France and Germany fear this will distract from the need to regulate financial markets which brought on the crisis more tightly. (Reuters)