RPT-GLOBAL ECONOMY WEEKAHEAD-New year, same old problems

(Repeat of item sent Sunday, Jan. 4)

By Ros Krasny

SAN FRANCISCO, Jan 5 (Reuters) - The new year won't bring cheer to the world's major economies, which face the aftershocks of an historic banking and credit crisis and a deep recession in the United States and much of the globe.

The U.S. Federal Reserve's breakthrough move to set its benchmark lending rate at zero to 0.25 percent could become a model for other central banks. The Bank of England is expected to lower its key rate on Thursday.

Highlights of the week's data calendar include U.S. December auto sales on Monday and non-farm payrolls on Friday. European markets could grapple with a dose of deflation when consumer price data is revealed.

Still, the resolve to put a smiley face on the new calendar could be helped by money markets, which have at least made it through the looking glass to 2009 without a fresh crisis erupting, and change on the way in Washington.

"The recovery of the money market is most apparent in the downtrend in LIBOR (the London Interbank Offered Rate), which is collapsing and is set to collapse further," said Tony Crescenzi, chief bond market strategist at Miller Tabak.

PLUMBING THE DEPTHS?

Even with potential improvements in market mechanisms, many economists expect the first quarter of 2009 in the United States to be at least as bleak as the final three months of 2008 appeared to be. They see no fast end to the upward spiral in job losses.

The U.S. recession, dated to December 2007, might end technically by mid-year with a return to positive growth. The risk is that recovery will be tepid. For that reason, Goldman Sachs now forecasts that the fed funds rate could stay near zero until late 2010.

On Friday, the Labor Department is expected to report that roughly 500,000 more Americans lost their jobs in December. That would push payroll losses in the fourth quarter alone to more than 1.3 million.

The jobless rate is forecast to rise to 6.9 percent from 6.7 percent, matching a level last seen in July 1993.

The link between consumer spending, employment and economic growth has become tighter during the current recession, given the scarcity of credit and the huge hit to household wealth from lower asset prices and plunging home values.

That trend, and the sense that the household savings rate will spike, pushing spending down further, threatens to put a consumer-led recovery on ice.

"Consumer buying power is increasingly dependent upon employment income -- which constitutes approximately two-thirds of total personal income," said economists Joseph LaVorgna and Carl Ricadonna at Deutsche Bank.

Wage and salary growth has been decelerating in the face of the sour labor environment. In December, average hourly earnings probably advanced by a tepid 0.2 percent.

"If (jobless) claims continue to rise at their current pace, employment compensation could stagnate in the first half of 2009 -- which would be an unprecedented event since the data was first published in 1959," the Deutsche economists said.

Now under way, then, is a rapid reduction in the proportion of the U.S. economy driven by consumer spending. Government spending is set to pick up the slack, in the form of a massive stimulus package from the incoming administration of Barack Obama.

"The government has to step in to fill the void ... in order to prevent a complete collapse of economic activity," said Eugenio Aleman, economist at Wells Fargo in Minneapolis. He warned nonetheless about the long-term dangers posed by an end-run around the forces of capitalism.

The cost of Obama's plan is thought likely to exceed $600 billion and possibly approach $1 trillion.

Writing in the Washington Post last week, Obama's chief economic adviser, Lawrence Summers, said the U.S. economy could fall $1 trillion short of its full capacity in 2009, and that "doing too little poses a greater threat of doing too much."

SAY IT ISN'T SO

While investors await the dawn of the Obama era, Aleman said the United States and other economies are facing up to an ugly rebuke of Say's Law of Markets -- essentially, the "build it and they will come" philosophy maintaining that supply creates its own demand.

"Try to explain this law to auto producers, or to auto dealers, or to home builders, or to restaurant owners, or to retailers in general," Aleman said.

"Say's Law is what has happened to the U.S. economy for the last decade or so, and the reason we are paying the price today ... it is the law of economic excess."

That lesson will be on display as soon as Monday, when U.S. auto sales figures are released. Total vehicle sales are forecast at 10 million units, the lowest since 1982.

"We believe the auto shutdowns will be an insurmountably negative driving force for the manufacturing sector at the start of 2009," said economists at Stone & McCarthy Research.

THE RACE FOR ZIRP

On Thursday the Bank of England is expected to deliver the first central bank rate cut of the year and follow the Federal Reserve's lead closer to the "zero bound." The BOE's base rate is now 2 percent.

"We see good potential for a further 100 basis points off the Bank Rate," said Eric Wand, analyst at 4CAST Ltd.

"Keeping some gunpowder dry is a useful methodology at times, but as Q1 and Q2 fundamentals will demonstrate, right now is really a case of 'all hands to the pumps.'"

The ECB's first policy meeting of 2009 is not until Jan 15. Some key officials, notably Vice-President Lucas Papademos, seem to be laying the groundwork for another interest rate cut from the current 2.5 percent.

"It is, in our view, significant that in the wake of the Dec. 18 Governing Council 'non-policy' meeting, such a senior ECB official is prepared to hint at lowering policy rates," said James Ashley, economist at Barclays Capital.

A range of European data should highlight disinflation amid a stagnant business and consumer climate, bolstering the case for another rate cut. Italy, the Netherlands and Switzerland are likely to report deceleration in the year-on-year consumer inflation rate, following the lead of Germany.

Industrial production data for November due on Friday is expected to show month-on-month declines in both Germany and France.

"The global recession continues to deepen. By this time next year, economic activity in most places hopefully will have stopped shrinking. But there are no guarantees," said Rory Robertson, analyst at Macquarie Bank in Sydney. (Editing by Dan Grebler)