The recession chokehold that is gripping the world's richest nations won't loosen until late this year, and Reuters polls show the economic outlook has dimmed for 2009 despite a vigorous global stock market rally.

The polls of 250 analysts across the developed world also found that the threat of deflation remains the bigger risk over the next year even though a significant minority say they are worried that future inflation may be the bigger danger.

If inflation were to take off again, any nascent recovery, which most economists agree will be brittle, could be snuffed out by rising market interest rates and any required policy response from central banks.

But economists are convinced that spare capacity in the world economy after a boom and bust of historic proportions will keep price pressures low and rising unemployment will further rein in consumer demand and tamp down wages.

What worries me more than this disconnect between economists' forecasts and the stock market is the disconnect between the stock market and the credit market, said Marco Annunziata, chief economist at UniCredit in London.

The credit market is telling you that there is a lot of pain still in the financial sector and this will make any recovery very difficult and very slow.

The Standard & Poor's 500 index of leading U.S. shares rallied more than 20 percent from a trough in March although stocks have pulled back some in the past few days and still appear to be in a bear market.

But credit spreads still remain wide.

And no wonder, given that toxic debts polluting banks and insurers around the world could total $4 trillion according to a press report this week citing new forecasts expected to come from the International Monetary Fund.

About two-thirds of economists polled across the G7 think the threat of deflation like that Japan suffered during its lost decade was a more serious threat over the next few years than a resurgence in inflation.


The latest Reuters survey results were collected over the past week, both before and immediately after leaders of the 20 biggest economies in the world gathered in London.

Those leaders have collectively pledged over a trillion dollars to save the global economy although critics say that measures to clean toxic assets off of bank balance sheets don't go far enough and that could still threaten future lending.

The U.S. outlook is the most likely to brighten first as it was the first economy to plunge into recession thanks to a mountain of bad housing loans and arcane financial products attached to a one-way bet that house prices would only rise.

But for now, no growth is forecast until later this year -- and it is weak. Perhaps more worrying is the pessimistic outlook for the industrial sector, which often is the first sector to lead the economy out of downturns.

The bottom clearly has not been reached, though the shocks are abating, said Donald Ratajczak, economist to U.S. broker and asset manager Morgan Keegan.

In Europe, the forecasts have darkened considerably for 2009 as a whole, even if private sector surveys have hinted that the pace of deterioration is slowing and a stabilization at very low levels may be at hand after the economy fell off a cliff.

The 16-country euro zone economy is expected to shrink in the first quarter by as much as it did in the dismal final months of 2008 and will barely grow in 2010. That compares to a more robust recovery forecast next year in the U.S.

One of the biggest threats to any recovery on either side of the Atlantic is the staggering rise in joblessness which appears to be accelerating. That could seriously dent hopes for any rebound in consumer spending.

The increase in unemployment is likely to dampen consumer demand and will increase downside risks for inflation or increase still low risks of deflation in the euro area, said Juergen Michels at Citi in London.

There were downgrades across the board for growth in France, Germany and Italy compared with what economists had predicted at the start of the year.

Japan's economy has taken a body blow from the collapse in world demand and the prognosis is even worse. Unemployment is expected to hit a record high and the economy is now forecast to shrink for six consecutive quarters.

Canada's economy should fare more like the U.S. and begin growing again later this year, according to the poll, but economists downgraded their outlook from the last survey taken three months ago.