Growth slows, markets feel good ahead of Davos

Much-feared worldwide panics from a collapse of the euro currency union have been avoided. China appears likely to remain an engine of global growth. Stocks are off to a running start in the New Year.

“There's a sense of relief that the worst didn't happen ... and I think that relief is probably justified,” said Nariman Behravesh, chief economist at IHS Global Insight.

Davos is the venue for the World Economic Forum, an annual gathering of more than 2,000 decision-makers from nearly 100 countries and hundreds of companies that starts Wednesday. The WEF has taken “Resilient Dynamism” as the theme for this year's event.

Yet the global economy is expected to remain sluggish in 2013, with two of the biggest economies — the euro alliance and Japan — in recession. There's also a risk that the United States, the world's largest economy, may slash government spending — a step that could dampen the world economy. Few think global economic growth will even match last year's tepid 3.3 percent.

Despite that, as fear of a catastrophe has eased, optimism appears to have taken hold among investors. The world's financial markets have surged. Both the U.S. Standard & Poor's 500 and Europe's STOXX 600 have risen 13.5 percent in the past 12 months.

Fueling much of the improvement has been a flood of monetary expansion from the world's central banks. The U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank have purchased financial assets such as bonds with newly created money. The central banks have also slashed short-term interest rates to record lows — to near zero in the case of the Fed. The ECB has lent more than (euro) 1 trillion to banks at low rates.

The European Central Bank gave the eurozone its biggest boost when it offered last fall to buy unlimited debt of heavily indebted countries such as Spain and Italy. That action lowered their borrowing costs and eased fears that those governments would default.

Fears that the group of 17 European countries that use the euro would break up under the weight of its debt crisis faded throughout 2012. One factor bolstering the eurozone was the deal struck between Europe and the International Monetary Fund to stop Greece from being forced to default on its debts and abandon the euro.

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