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Policymakers caution on global economy, stocks slide

China's economy is headed in the right direction but the foundations of the recovery are not yet solid, a Chinese central bank official said, adding to a chorus of voices cautioning against expectations of a rapid rebound from the global crisis.

The world economy is struggling with the lingering effects of the collapse of the US housing market last year, with access to credit still tight, companies and consumers reluctant to spend and job losses mounting.

The US unemployment rate is likely to hit 10% in the next couple of months, a White House spokesman said on Monday.

The US unemployment rate already stands at 9.4%, the highest level in about 25 years, and many analysts believe it could continue to climb despite the $787 billion economic stimulus package passed early this year by Congress.

Around the world, governments and central banks have been pouring money into their systems, cutting interest rates to record lows, buying financial assets and building infrastructure to stimulate demand.

Su Ning, a vice-governor of the People's Bank of China, said he hoped China would be among the first economies to recover from the crisis.

“The overall situation is stabilizing and moving in the right direction,” Su said at a conference on Tuesday.

But he cautioned that the pick-up was still not firmly anchored and expressed particular concern about the “grim” international environment for Chinese exporters as the financial crisis continues to take a toll on global growth.

Both the World Bank and the Organisation for Economic Co-operation and Development offered dispiriting assessments of the world economy on Monday, adding to concerns about the economic outlook that has scuppered a rally in equity markets.

Wall Street suffered its worst one-day loss in two months on Monday, with the S&P 500 sliding 3% and into negative territory for the year.

Asian markets followed suit on Tuesday, with Japan's Nikkei down more than 3% and MSCI's measure of stocks elsewhere in the Asia-Pacific down a similar amount.

MSCI's Asia-Pacific index had soared as much as two-thirds from its March low until early this month, raising concerns that markets had been too aggressive pricing in a recovery and prompting investors to book profits ahead of the traditional summer lull. The index is now more than 8% off its early June peak.

Prices for oil and industrial metals also gave up ground as investors questioned the strength of the recovery.

“Whether demand in oil and commodity markets can move higher from here is a big question mark,” said Tony Russell, a senior equities adviser at ABN AMRO Morgans in Australia. “We have seen some better news on the economy but we need to see more.”

US housing data due later on Tuesday will be an important test for nervous markets, while the Federal Reserve's interest rate setting committee begins its two-day meeting.

While no changes are expected in the current short-term interest rate near zero, attention is focused on whether the Fed will expand its purchases of government debt from the $300 billion already pledged to fight the recession. (Reuters)