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The European Central Bank’s Governing Council discussed a package of asset purchases worth about 125 billion euros ($170 billion) this month, more than twice the amount finally agreed upon, people briefed on the talks said.

The package proposed at the May 7 council meeting included buying commercial paper and corporate bonds, said the people, who declined to be identified because the discussions were private. After the meeting, President Jean-Claude Trichet announced plans to acquire 60 billion euros of covered bonds, low-risk securities backed by mortgages and public-sector loans. An ECB spokeswoman declined to comment.

Germany’s Axel Weber opposed buying assets and argues the ECB should maintain its focus on getting banks to lend to each other again. Smaller countries in the 16-nation euro area pushed for the ECB to follow the Federal Reserve and the Bank of England in buying a broader range of assets to pump money into the economy and counter the possible risk of deflation.

“For an economy the size of the euro zone, 60 billion is chicken feed,” said Peter Dixon, an economist at Commerzbank AG in London. A sum of 125 billion euros is “more realistic, though it’s still half of what you’d like to see.”

The ECB’s plan is worth 0.6 percent of euro-region gross domestic product. Asset-purchase programs by the Federal Reserve and the Bank of England amount to about 12 percent of U.S. GDP and 10 percent of U.K. GDP.

Diversity

The diversity of views on the ECB’s 22-member council may make it harder for Trichet to restore consensus at the central bank and help an economy struggling to escape its worst recession since World War II. Before the May meeting, Trichet asked council members not to publicly debate the next policy steps, Austrian governor Ewald Nowotny said on April 30.

Slovenian central bank chief Marko Kranjec said in a May 13 interview that “we don’t exclude the purchase of first-class corporate bonds” and “short-term securities such as commercial paper.” He also said that an increase beyond 60 billion euros was “very likely.”

Six days later, he said that the comments were taken “out of context.”

Slovakia’s Ivan Sramko said May 14 he “can exclude nothing” on non-standard measures. Nowotny, in a speech on central banks in general, said they can buy government bonds when interest rates near zero. He later moved to “avoid some misunderstandings,” saying policy makers had a “clear common view.”

‘Powerful Comeback’

Bundesbank President Weber on May 13 insisted that 60 billion euros was the “maximum” the ECB will spend on assets and said inflation may make a “rapid and powerful comeback” if the economy recovers faster than expected business cards.

Athanasios Orphanides from Cyprus, the former Fed economist who has argued for an aggressive response to the financial crisis, warned the same day that deflationary expectations must not be allowed to develop.

“You have completely conflicting signals from different members, creating confusion,” said Jacques Cailloux, chief euro-region economist at Royal Bank of Scotland Group Plc in London. “There may come a time when this cacophony becomes unbearable.”

“Intervention by Trichet to restore a certain order would help,” said Aurelio Maccario, chief euro-area economist at UniCredit Group in Milan.

‘Full Blown’

Asked on May 7 whether the ECB had considered buying other assets, Trichet said: “We have decided to engage in the purchase of covered bonds” and “have not taken any other decision on any other purchase.”

He said the ECB will give details of its covered bond purchases after its next council meeting on June 4. The securities have suffered a slump in demand during the crisis.

Weber “will block any further attempts to buy assets,” said Nick Kounis, chief euro-region economist at Fortis in Amsterdam. “As long as the Bundesbank is against it, we won’t get a full-blown” asset-purchase program.

The ECB this month cut its benchmark interest rate to a record-low 1 percent and Trichet said that’s not necessarily its lowest level. While Weber wants to make 1 percent the floor for the key rate, others say deeper cuts may yet be necessary.

Council members have also disagreed about the outlook for Europe’s recovery. Vice President Lucas Papademos said last week that “the recovery may start sooner than previously envisaged,” while Dutch official Nout Wellink warned against becoming “too optimistic when you see a few swallows flying around.”

Confidence Improves

German investor confidence rose more than economists forecast to a three-year high in May. At the same time, Europe’s largest economy shrank the most since 1970 in the first quarter and industrial output across the euro region plunged the most since at least 1986 in March.

The euro-area economy will contract 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S. and 4.1 percent slump in the U.K.

The Fed, Bank of England and Bank of Japan have already lowered their key rates to close to zero and are buying government and corporate debt, effectively pumping new money into their economies to revive growth.

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Japan’s economy shrank by a record last quarter as exports collapsed and consumers and businesses slashed spending, a decline that probably marked the low point in the country’s worst recession since World War II.

Gross domestic product fell an annualized 15.2 percent in the three months ended March 31, following a revised fourth- quarter drop of 14.4 percent, the Cabinet Office said today in Tokyo. The economy contracted 3.5 percent in the year ended March 31, the most since records began in 1955.

Exports plunged an unprecedented 26 percent last quarter, forcing companies from Toyota Motor Corp. to Hitachi Ltd. to cut production, workers and wages. Stocks have gained 32 percent since reaching a 26-year low in March on speculation worldwide interest-rate reductions and spending by governments will halt the slide in the world’s second-largest economy.

“There was a collapse across the board,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. Still, he added, there’s “light at the end of the tunnel” and the economy will resume growing this quarter as companies replenish inventories and stimulus plans at home and abroad take effect.

The yen traded at 95.59 per dollar at 12:56 p.m. in Tokyo from 96.16 before the report was published. The Nikkei 225 Stock Average rose 0.3 percent. Economists surveyed predicted the economy would shrink 16.1 percent.

Worse Than U.S.

GDP fell 4 percent on a non-annualized basis, more than double the U.S.’s 1.6 percent slide. It’s also worse than Europe’s record 2.5 percent contraction. Without adjusting for price changes, Japan shrank 2.9 percent last quarter.

Weaker domestic demand was the biggest contributor to the decline, shaving 2.6 percentage points off GDP, the most since 1974. Net exports — the difference between exports and imports — was responsible for 1.4 percentage points of the drop.

Consumer spending slid 1.1 percent and business investment plunged a record 10.4 percent. Economists say companies will keep cutting spending because the decline in demand has left factories and workers underused.

“There is a huge problem of over-capacity,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo. “That means capital spending is not likely to pick up.”

Hitachi, a maker of nuclear reactors, home appliances and hard-disk drives, will trim costs by 500 billion yen ($5.2 billion) this fiscal year to minimize losses after a record 787.3 billion yen deficit last year. The Tokyo-based company said in January it plans to cut 7,000 jobs.

May Grow

Still, reports in the past month suggest the world’s second-largest economy may grow for the first time in a year this quarter, albeit from a low point, as exports stabilize and Prime Minister Taro Aso’s 15 paydayloans.4 trillion yen stimulus plan, announced in April, takes effect.

Consumer confidence climbed to a 10-month high in April. Exports increased in March from a month earlier, and factory output rose for the first time since September.

“Japan, first of all, will get a big boost from fiscal stimulus,” Thomas Byrne, senior vice president of Moody’s Investors Service, said in an interview in Tokyo. “Second, if the global economy picks up a little bit, that will help tremendously in Japan because of its dependence on exports.”

Byrne said Moody’s is unlikely to cut Japan’s debt rating over the next year because investors are willing to buy bonds that will fund the stimulus plans. Moody’s unified Japan’s ratings at Aa2 this week, raising the local-currency assessment from Aa3 and lowering the foreign-currency view from Aaa.

Replenishing Inventories

“While the economy will continue to be in a severe state, I expect less pressure from inventory adjustments and the stimulus package to provide support,” Economy and Fiscal Policy Minister Kaoru Yosano said after today’s report.

Falling inventories accounted for 0.3 percentage point, or about a tenth, of last quarter’s contraction. Companies including Honda Motor Corp. have cut stockpiles at a quicker rate than sales have declined, giving them room to boost output.

Honda plans to increase production in Japan this quarter as dealerships clear inventories, the Wall Street Journal reported last week. Auto sales in Japan and the U.S. may have “bottomed,” Fuji Heavy Industries Ltd. President Ikuo Mori said in Tokyo today. Fuji Heavy makes Subaru-brand cars.

Still, the failure of export demand to do better than simply stabilize will probably limit the scope of Japan’s recovery. Toyota, Hitachi, and Panasonic Corp. all forecast continued losses in the current business year. Panasonic said last week it plans to close about 20 factories this year and proceed with the 15,000 job cuts announced in February.

“We basically bottomed out,” said Jesper Koll, chief executive officer of hedge fund adviser TRJ Tantallon Research Japan. Even so, “on the consumer spending side you’ve got a very clear negative from the severe labor market adjustment.”

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Treasury Secretary Timothy Geithner said the U.S. government shouldn’t set a ceiling on executive pay and instead should seek to ensure compensation packages don’t encourage excessive risk taking.

“I don’t think our government should set caps on compensation,” he said in answering questions at an event at the National Press Club today in Washington. “What I think we need to do is make sure we put in place some broad constraints on the incentives compensation systems create.”

Geithner’s remarks indicate the administration’s proposals may focus more on principles than on specific prescriptions for how financial companies compensate their executives. Federal Deposit Insurance Corp. Chairman Sheila Bair made similar comments last week, while calling for broad application of guidelines to include traders as well as corporate chiefs.

The Obama administration is implementing pay restrictions on banks receiving government aid, which were set by Congress as part of this year’s $787 billion economic stimulus legislation.

The administration also is reviewing ways to toughen supervision of financial markets and companies to avoid a repeat of a crisis that has cost $1.5 trillion in credit losses since 2007. Geithner said incentives in pay packages contributed to the turmoil.

‘Broad Caps’

“We had a crisis magnified by the fact that people were paid to take a huge amount of short-term risk, and that’s something that’s preventable,” he said. “We shouldn’t be setting broad caps, I think we should be trying to get the incentives better.”

Geithner said the administration is in touch with California and other state and local governments that are having trouble balancing their budgets. While there would be efforts to help those governments, he disputed the prospects of a “federal bailout” for municipal bond markets.

“I wouldn’t use the word bailout or federal,” Geithner said. “I would say we’re in close consultation with the people who are looking at ways to make sure these markets are working so that states and munis can meet their needs bad credit pay day loans.”

The House Financial Services Committee has scheduled a May 21 hearing to consider four bills related to the municipal bond markets.

Budget Woes

Recently, such markets have seen “significant improvement” after a “traumatic adjustment” caused by the financial crisis, Geithner said. He said states now need to address their long-term budget problems, some of which predated the credit market woes.

The Treasury secretary also said that the U.S. economy has stabilized, even while many people may not feel a turnaround immediately.

“Unemployment is going to keep increasing for a while,” he said. “It’s not going to feel better for a long time for millions of Americans.”

The U.S. economy lost 539,000 jobs in April, the smallest drop in six months, as the worst recession in half a century started to ease and the federal government stepped up hiring for the country’s next census. Still, the unemployment rate jumped to 8.9 percent, the highest level since 1983.

The economy has lost 5.7 million jobs since payrolls started dropping in January of last year.

Geithner said his coming trip to Beijing is part of the Obama administration’s efforts to build ties with China, the second biggest U.S. trading partner and the largest foreign holder of U.S. government debt.

“We’ll talk about how they’re doing in strengthening their economy, shifting to a more balanced domestic demand-led growth, and they’re going to want to hear from us in terms of how we’re in getting our economy out of the crisis,” Geithner said.

The U.S. also will continue to encourage China to take a more active role in international organizations, he said. “We want them to have a seat at the table,” Geithner said. “We want them to feel invested in making the system work.”

– With reporting by Shobhana Chandra in Washington. Editors: Brendan Murray, James Tyson

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Builders probably broke ground on more houses in April and a measure of the U.S. economic outlook rose for the first time in almost a year, adding to signs the recession was abating, economists said before reports this week.

Housing starts increased 2 percent to an annual rate of 520,000 last month, according to the median forecast of economists surveyed by Bloomberg News before a Commerce Department report on May 19. The index of leading economic indicators probably climbed 0.8 percent, figures from the Conference Board may show.

An easing in the housing slump, now in its fourth year, is an essential element of most forecasts for an economic recovery later this year. Rising stock prices and improving consumer confidence are among the components of the leading index that are stoking speculation the economy will begin to grow again in the next six months.

“Starts reached their trough earlier this year and are going to be on a very slow path to recovery through the rest of the year,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “It does look like the recession is coming to an end.”

The leading indicators index, a measure of the economy’s likely path over the next three to six months, is due from the New York-based private research group on May 21.

Commerce’s housing report may also show building permits, a sign of future construction and another component of the leading index, rose 2.7 percent to a 530,000 rate in April from the prior month’s record low.

More Stable

Housing data in recent weeks have shown signs of stabilization. Existing home sales, while reaching a decade-low in January, have held within a narrow range centered on a 4.6 million annual pace over the last five months. Sales of new houses, while still depressed, have bounced from a record low reached in January.

Foreclosure-driven declines in prices have contributed to stabilizing the resales market. Distressed sales have made up as much as 50 percent of existing home purchases in recent months, according to the National Association of Realtors.

The biggest contraction in residential construction on record has helped builders trim the glut of properties on the market even as sales faltered cheap payday loans. The number of unsold new houses dropped in March to the lowest level since 2002, according to Commerce figures.

Less Pessimistic

Builders are becoming less pessimistic. The National Association of Home Builders/Wells Fargo’s sentiment index probably rose in May to its highest level in eight months, economists forecast a report tomorrow may show.

Still, construction firms continue to feel the pain of having to drop prices to spur demand. D.R. Horton Inc., the largest U.S. homebuilder by market value, on May 5 reported a quarterly loss that exceeded analysts’ estimates as orders dropped 45 percent from a year earlier.

“Market conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of both new and existing homes, increasing unemployment, tight credit for homebuyers and eroding consumer confidence,” said Chairman Donald Horton in a statement.

Financing also remains scarce, a survey of banks by the Federal Reserve showed this month. A larger share of lenders tightened terms on residential mortgages compared with the prior survey, the Fed said on May 4. At the same time, about 35 percent of domestic respondents saw increased demand for prime mortgages, the first gain in at least two years.

Stocks, Sentiment

Last month’s jump in the leading index would be the first since June 2008, and the biggest since November 2005. The 12 percent surge in the Standard & Poor’s 500 index average, and the biggest increase in consumers’ economic outlook in more than two years propelled the gauge higher.

The Fed on May 20 will release the minutes of its April 29 monetary policy meeting, when it refrained from increasing purchases of securities, saying the economy was showing signs of stability.

The following day, a survey from the Fed Bank of Philadelphia may show manufacturing in eastern Pennsylvania, southern New Jersey and Delaware contracted this month at the slowest rate since September, adding to signs the factory slump is easing.

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Europe’s economy contracted at the fastest pace in at least 13 years in the first quarter as companies cut output and jobs to survive the worst global slump in more than six decades.

Gross domestic product in the 16-member euro region fell 2.5 percent from the fourth quarter, the biggest decline since the data were first compiled in 1995, the European Union’s statistics office in Luxembourg said today. That exceeded the 2 percent contraction economists expected in a Bloomberg survey and followed a 1.6 percent drop in the prior three months.

The deepest global recession since World War II is curbing European exports and eroding consumer demand, forcing companies to cut spending and jobs. The German and Italian economies also contracted by the most on record. Hong Kong’s economy shrank at the fastest pace since at least 1990, prompting the government to forecast a full-year contraction of as much as 6.5 percent.

“The recession is an exceptionally deep one,” said Kenneth Wattret, chief euro-region economist at BNP Paribas in London. “The headwinds to growth are considerable, consistent with output contraction and sharply rising unemployment for some time to come.”

From a year earlier, the euro-area economy shrank 4.6 percent, also the biggest decline on record, today’s report showed. The statistics office is scheduled to publish a breakdown of first-quarter GDP on June 3.

Biggest Drop

In Germany, Europe’s largest economy, GDP dropped 3.8 percent in the first quarter from the previous three months. That’s the biggest drop since data were first compiled in 1970. Italian GDP fell 2.4 percent, the most since records began in 1980, and the French economy shrank 1.2 percent in that period. The economies of the Netherlands and Austria also contracted.

The slump in western Europe is hurting its neighbors to the east by cutting demand for their exports and crippling foreign investment in the former communist states. Five eastern members of the EU reported first-quarter contractions today, with Hungary and Romania showing annual GDP declines of 6.4 percent.

The euro was lower against the dollar following the GDP data. The European currency traded at $1.3559 at 1:50 p.m. in Brussels, down 0.6 percent.

While policy makers have expressed optimism that the global recession may be easing, recent reports indicate any recovery is likely to be slow. The world economy will shrink 1.3 percent this year and only return to growth in 2010, according to forecasts by the International Monetary Fund, which has led bailout packages for Hungary, Romania and Latvia.

‘Slow and Protracted’

Bank of England Governor Mervyn King said on May 13 that the U.K.’s recovery will be “slow and protracted.” In the U high risk personal loans.S., the world’s biggest economy, rising unemployment may restrain consumer spending, the biggest part of GDP.

In a sign that U.S. manufacturing may be stabilizing, industrial production there probably declined in April at the slowest pace in six months, according to the median estimate in a Bloomberg survey of economists. The output report is due at 3:15 p.m.

In Europe, Munich-based Bayerische Motoren Werke AG, the world’s largest luxury-car maker, is among companies cutting jobs and curtailing production to weather a drop in demand. In April, vehicle sales of the BMW brand dropped about 23 percent, Chief Executive Officer Norbert Reithofer said on May 6.

“It’s too early to sound the all-clear,” Reithofer said that day. “We don’t anticipate a stable recovery before 2010.”

Rising Unemployment

As the global slump curbs orders and rising unemployment undermines consumer spending, companies are being forced to hold the line on prices. Euro-area inflation held at a record-low 0.6 percent in April, separate data showed today. That is less than half the European Central Bank’s aim of just below 2 percent, and an EU gauge of price expectations turned negative last month for the first time since 1990.

While declining prices leave consumers with more money to spend, companies may not be able to count on household demand to bolster earnings this year. The commission earlier this month forecast unemployment will jump to 11.5 percent next year with the highest rates expected in Spain and Ireland. The region’s jobless rate is currently at 8.9 percent, a three-year high.

Rome-based Bulgari SpA, the world’s third-largest jeweler, this week reported its first quarterly loss in a decade on slumping sales. Jean-Paul Agon, chief executive officer of Paris-based L’Oreal SA, the world’s largest cosmetics maker, earlier this month called the first quarter “tough.”

Record Low

The ECB on May 7 lowered its benchmark interest rate to 1 percent, a record low, and pledged to buy 60 billion euros ($82 billion) of covered bonds, securities backed by mortgages and public-sector loans, to stimulate the economy. Details of the asset-purchase plan are to be unveiled next month.

“We expect the ECB to keep interest rates down at the current level until well into 2010 and it’s very possible that they could be trimmed further,” said Howard Archer, chief European economist at IHS Global Insight in London. “It is also very possible that the ECB could ultimately extend and widen its asset-purchase scheme if recent green shoots wither away.”

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European Central Bank policy makers clashed over the bank’s asset-buying program less than a week after President Jean-Claude Trichet engineered a truce.

Slovenia’s Marko Kranjec said yesterday the ECB is likely to spend more than the 60 billion euros ($82 billion) it has earmarked for covered-bond purchases and hasn’t ruled out acquiring corporate bonds and commercial paper. Hours later Germany’s Axel Weber, who had already said there’s no need to buy other assets, insisted 60 billion euros is the “maximum.” Slovakia’s Ivan Sramko said today nothing can be excluded.

“The ECB Governing Council looks like a battlefield,” said Laurent Bilke, an economist at Nomura International in London. “It would be simply ridiculous if we weren’t already in the middle of the worst recession in postwar history. But now it has more dramatic consequences. Trichet will have to restore some order.”

The diverging views suggest the ECB is still split over the best way to tackle Europe’s worst recession since World War II, even after Trichet said the decisions taken last week by the 22- member Governing Council were “unanimous.” Weber has always opposed asset purchases and warned yesterday against stimulating the economy too much. Other policy makers have argued the bank may need to do more to counter the risk of deflation.

‘Peanuts’

Trichet on May 7 cut the benchmark interest rate to a record-low 1 percent and said that’s not necessarily its lowest level. He also announced the ECB will buy 60 billion euros of covered bonds, securities backed by mortgages and public-sector loans which have suffered a slump in demand during the financial crisis. Details of the plan are to be unveiled next month.

“The 60 billion euros they announced is peanuts for an economy the size of the euro zone,” economics professor and former Bank of England policy maker Willem Buiter said at a conference in Dublin yesterday. “I expect they will announce more or that the recession in the euro zone will be longer and deeper than would otherwise be necessary.”

The Federal Reserve, Bank of England and Bank of Japan have lowered their key rates to close to zero and are buying government and corporate debt, effectively pumping new money into their economies to prevent the development of a deflationary spiral.

The economy of the 16 euro nations will contract 4.2 percent this year, according to the International Monetary Fund. Recent reports suggest the recession may be bottoming out.

Compromise

Trichet was forced to compromise on the ECB’s asset- purchase program in order to get Weber on board. Weber argues Europe isn’t at risk of deflation and the ECB should avoid taking additional risk onto its balance sheet car insurance. He also wants the ECB to signal an end to rate cuts.

Other council members say the ECB can do more. Athanasios Orphanides, the former Fed economist who now heads the Cypriot central bank, has said the ECB may have to continue easing policy if deflation risks increase.

Kranjec, who heads the Bank of Slovenia, said in an interview in Ljubljana yesterday that the ECB can lower rates further if needed and 60 billion euros is “not the final amount” for the asset-purchase program. The bank has not ruled out buying corporate bonds or commercial paper, he said.

Sramko said at a conference in Vienna today that the ECB “can exclude nothing” on non-standard measures. “I’m sure the council will also discuss other possibilities,” he said.

Still, Marc Chandler, head of global currency strategy at Brown Brothers Harriman in New York, said that as president of Germany’s Bundesbank Weber has considerable influence.

‘Guy From Slovenia’

His views “probably reflect the attitude of most of the other participants,” he said. “Who’s going to agree with the guy from Slovenia against Weber?”

Austria’s Ewald Nowotny said today the ECB has decided to buy covered bonds and “that’s it. No further options are of relevance now.”

Weber said in a speech in London last night that inflation may make a “rapid and powerful comeback” if the economy recovers faster than expected and policy isn’t tightened as quickly as it was loosened.

ECB Vice President Lucas Papademos agreed, saying there are signs the economy is stabilizing and “the recovery may start sooner than previously envisaged.”

“Once financial conditions and the macroeconomic environment improve, the non-standard monetary policy measures taken should be quickly unwound,” Papademos said in Vienna.

At the same conference, Dutch council member Nout Wellink contradicted Papademos on the economy, saying it’s best not to “become too optimistic when you see a few swallows flying around or green shoots.”

Turning to asset purchases, Wellink said: “The council has made it’s decision and that’s it for the time being. There is a need under the present circumstance, with so much uncertainty around, to be clear. There is a need for a precise clear-cut message. We have given such a message.”

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China’s industrial production grew less than economists estimated in April as electricity output fell and exports tumbled. Retail sales climbed.

Output rose 7.3 percent from a year earlier, the statistics bureau said today, after gaining 8.3 percent in March. That was less than the 8.6 percent median estimate of 20 economists surveyed by Bloomberg News. Retail sales grew 14.8 percent from a year earlier.

The data adds to evidence that a 4 trillion yuan ($586 billion) stimulus plan is buoying domestic growth, while the global recession takes a toll on exports and related industries. Urban fixed-asset investment grew a more-than-expected 30.5 percent in the first four months of this year, while a slump in overseas shipments deepened in April, reports showed yesterday.

“The recovery is still quite fragile — exports are still very weak,” said Isaac Meng,” a senior economist at BNP Paribas SA in Beijing. “Domestic demand is resilient.”

Retail sales grew more than the economists’ median estimate of 14.5 percent, after climbing 14.7 percent in March.

The yuan traded at 6.8223 against the dollar as of 12:05 p.m. in Shanghai, from 6.8226 before the data was released. The Shanghai Composite Index of stocks rose 0.5 percent.

A decline in power output accelerated to 3.5 percent in April from 1.3 percent in March, the statistics bureau said. Growth slowed in the production of computers, mobile phones, iron, steel and 10 non-ferrous metals.

Cement, Automobiles

Output of automobiles, cement, air-conditioners and oil products grew more strongly.

Shanghai’s stock index has climbed 44 percent this year on optimism that the government can engineer an economic revival. New lending is already higher than the government’s targeted minimum of 5 trillion yuan for the year and money supply surged by a record last month, central bank data showed this week direct faxless payday loans.

China’s vehicle sales have topped those in the U.S. this year. General Motors Corp. said its Chinese sales jumped last month to a record as government subsidies spurred demand.

“Data released this week displayed a vivid picture of a tug of war between sluggish external demand and robust domestic demand,” said Lu Ting, an economist with Merrill Lynch & Co. in Hong Kong. Inventory reductions may have played a role in weaker output growth, Lu said.

Money-supply growth tends to precede output gains by two quarters, suggesting production will strengthen in coming months, said Jing Ulrich, Hong Kong-based chairwoman of China equities at JPMorgan Chase & Co.

‘Solid Recovery’

The People’s Bank of China cautioned last week that the foundations for a recovery were not “solid,” with small businesses still lacking credit.

Economists were overly optimistic about April’s production because of gains in an official manufacturing index, which doesn’t adequately reflect small businesses, said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong.

“Unless the corporate sector picks up steam, the economy as a whole cannot be recovering on a sustainable basis,” Ma said.

China is battling a global recession that choked off export demand, dragging economic growth to 6.1 percent in the first quarter, the slowest pace in almost a decade. Overseas shipments declined 22.6 percent in April from a year earlier, the customs bureau said yesterday.

Today’s industrial-production number compares with a collapse in output growth to 3.8 percent in January and February combined and a 15.7 percent increase a year earlier.

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Australian Prime Minister Kevin Rudd’s bid to ensure his housing market avoids the global property slump may push a generation of buyers into a debt crisis.

Grants of as much as A$21,000 ($16,142) to first-time buyers and the lowest interest rates in 49 years have emboldened more than 40,000 young Australians to take out home loans since October, stoking demand for properties that cost less than A$500,000.

These buyers may be vulnerable when interest rates begin rising, potentially triggering a jump in foreclosures that will drive down property prices, cut profits at banks and damp household spending, which accounts for half the economy. A surge in defaults in America was a key trigger for the financial crisis that pushed the global economy into its worst recession since World War II.

“We’re mirroring what happened to the U.S. three years ago, when people who shouldn’t have been in the market bought houses,” said Martin North, managing director of Fujitsu Australia, a Sydney-based property-consulting company. “It’s a strategy set for an unfortunate outcome.”

As Australia slides into its first recession since 1991, Rudd’s payments have been criticized by economists and newspapers for fueling a property boom that may burst once the grants are reduced, possibly as soon as July 1.

No Subprime Crisis

While the central bank says Australia doesn’t have a subprime crisis because banks have tightened lending standards, recent reports show first-time buyers are driving a residential construction industry that employs 5 percent of the workforce. New home sales have surged 22 percent this year, and building approvals climbed 12 percent in February and March.

“March was the busiest month I’ve ever had,” said Peita Jackson, a real-estate agent at Bradfield & Prichard, who specializes in selling homes in Sydney’s eastern suburbs. “I sold six properties, and four were to first-time buyers.”

Former Prime Minister John Howard introduced the grants in 2000 to boost a slumping housing market. Last year Rudd tripled the payments for new homes to A$21,000 and doubled handouts for existing houses to A$14,000 to support the economy.

The increases coincided with record interest-rate cuts by Reserve Bank Governor Glenn Stevens, who has reduced the overnight cash rate target by 4.25 percentage points since September to a 49-year low of 3 percent.

Tax-Free Boost

The rate cuts have lowered payments on an average A$250,000 mortgage to A$1,470 from A$2,120. The Reserve Bank says that equals an 8 percent tax-free boost to family incomes. About 90 percent of Australians hold variable-rate loans that are adjusted when the central bank changes its benchmark rate.

“All these things have increased the demand side of property and not the supply side, which always results in increased prices,” said John Lindeman, head of research at property-information company Residex Pty in Sydney cash advance.

The 10 suburbs with the biggest prices gains in Sydney during the six months through March were all in locations where homes cost less than the city’s median price of A$564,500, according to Lindeman. The biggest jump was in Greenfield Park, 36 kilometers (22 miles) west of the city center, where the median price rose by A$23,700 to A$420,000.

“We’re setting up a whole generation of people for grief,” Lindeman said. “Interest rates will go up, and that’s when they will feel the pain.”

Prospective Owners

The government grants and interest-rate cuts have prompted first-time buyers, who accounted for a record 27 percent of dwellings financed in February, to borrow more than other prospective home owners. Lending to these consumers surged 6.1 percent between October and February to an average of A$280,600, the Statistics Bureau said. By contrast, home loans to all borrowers fell 1.1 percent to A$253,200.

“For many buyers, the grant was critical,” said Fujitsu’s North. “Over 30 percent had loan-to-valuation ratios on their properties of 95 percent or higher.”

This may eventually leave some new buyers with so-called upside-down loans, as they owe more on their mortgage than the market price of their home. That threat will be heightened if unemployment climbs above 7 percent from the current rate of 5.4 percent, as forecast by the government.

Rudd, Stevens and the International Monetary Fund have all said Australia is in a recession as companies such as BHP Billiton Ltd. and Qantas Airways Ltd. fire workers. Gross domestic product declined 0.5 percent in the quarter ended December 2008 from the previous three months.

Disappearing Jobs

While supporters of the grants say they have created 20,000 construction jobs, many of these jobs may disappear later this year. Rudd signaled last month that the increased handouts may not be extended beyond June 30, reverting to A$7,000 for new and existing homes.

“All good things must come to an end,” Rudd said April 23. The government will announce any changes to the grants when it releases its budget tomorrow.

Some prospective home buyers hope the grants will be cut.

Ludmila Soboleva, a 40-year-old drugs researcher, has been looking for an apartment in Sydney’s eastern suburbs since November, without success.

“Everyone told me this is the best time to buy something but for properties I can afford, it’s a nightmare,” she said. “I wish they would cut this grant so maybe there will be fewer people” trying to buy.

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Payrolls in the U.S. shrank in April by the least in six months as the worst recession in half a century started to ease and the federal government stepped up hiring for the country’s next census.

Payrolls fell by 539,000, fewer than economists forecast, after a 699,000 loss in March, Labor Department figures showed yesterday in Washington. Still, the unemployment rate jumped to 8.9 percent, the highest level since 1983.

The economy has lost 5.7 million jobs since payrolls started dropping in January of last year. At the same time, the jobless rate probably won’t start retreating until an economic recovery is secured, and the loss in wages will hold back consumer spending for months, analysts said.

“The most intense pace of reductions in the labor market appear to be behind us,” said Joseph Brusuelas, director at Moody’s Economy.com in West Chester, Pennsylvania. “The economy has taken several tentative steps on the road to stabilization.”

DuPont Co. and Microsoft Corp. this week said more staff reductions may be necessary. Part of the reduction in job losses in April was due to a jump in government jobs, spurred by the hiring about 60,000 people to help in the 2010 census.

Stocks rallied yesterday after the conclusion of financial regulators’ stress test on the largest U.S. banks, and Treasuries gained. The Standard & Poor’s 500 Stock Index rose 2.4 percent to 929.23, and yields on benchmark 10-year notes fell to 3.29 percent in New York from 3.34 percent a day earlier.

Negative Revisions

Revisions for figures previously reported for March and February subtracted 66,000 more workers from payrolls.

“The numbers are sobering,” U.S. Labor Secretary Hilda Solis said in a conference call with reporters yesterday. “We may see more layoffs but we may see a slowing” in the pace.

Public payrolls rose by 72,000 after falling 6,000. The U.S. Census Bureau, which began hiring temporary workers to start conducting the population count that happens once every 10 years, will add more than 1.4 million people over the next year.

Payrolls were forecast to drop 600,000 after a 663,000 decrease initially reported for March, according to the median of 70 economists surveyed by Bloomberg News. Estimates ranged from losses of 360,000 to 750,000.

The jobless rate matched the projection of 8.9 percent, and was up from 8.5 percent in March. Forecasts ranged from 8.6 percent to 9.1 percent.

Worst Slump

Since the recession started in December 2007, the world’s largest economy has lost the most jobs of any economic slump since the Great Depression.

Christina Romer, head of the White House Council of Economic Advisers, said while the job losses are “very distressing” they don’t compare with levels seen in the 1930s, when unemployment soared to about 25 percent.

“We are seeing a lot of numbers that are suggesting glimmers of hope,” Romer said in an interview on Bloomberg Television yesterday. Consumers are “starting to spend again” and President Barack Obama’s $787 billion stimulus package “is hitting the economy americashadvance.”

Factory payrolls fell by 149,000 in April after decreasing by 167,000 in the prior month. Economists forecast a drop of 155,000. The decline included a drop of 29,100 jobs in auto manufacturing and parts industries.

Payrolls at builders fell 110,000 after decreasing 135,000 the prior month. Financial firms cut payrolls by 40,000, after a 43,000 reduction.

Smaller Drop

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 269,000 workers after falling 381,000. Retail payrolls decreased by 46,700 after a 63,900 decline.

The jobless rate may rise to 9.5 percent by year-end, economists said in an April Bloomberg survey. Tests run by the government to determine whether 19 of the largest U.S. banks had enough capital to withstand deterioration in the economy used an “adverse scenario” that included an average unemployment rate of 8.9 percent in 2009 and 10.3 percent next year.

The results, issued on May 7, showed 10 banks needed to raise a total of $74.6 billion in capital and that losses under “more adverse” economic conditions than most economists anticipate could total $599.2 billion over two years. Mortgage losses present the biggest part of the risk, at $185.5 billion.

Bernanke’s View

“We are likely to see further sizable job losses and increased unemployment in coming months,” Federal Reserve Chairman Ben S. Bernanke said in testimony to lawmakers this week. Still, policy makers “expect economic activity to bottom out, then to turn up later this year.”

Automakers are among the hardest hit industries. Vehicles sold at a 9.3 million annual pace in April, less than forecast and down from a 9.9 million pace a month earlier, industry figures showed last week.

More job cuts may be in train. Chrysler LLC was pushed into bankruptcy by the government last week, and General Motors Corp., surviving on U.S. loans, is working to beat a June 1 bankruptcy deadline.

Job losses threaten to restrain consumer spending after a first-quarter rebound. Americans will probably retrench again this quarter before spending shows sustained gains in the second half of 2009, according to economists surveyed last month.

DuPont, the third-biggest U.S. chemical maker, plans to eliminate an additional 2,000 positions, while Microsoft, the world’s largest software maker, may reduce staff further even as it is completing most of its 5,000 job cuts faster than planned.

“We will continue to closely monitor the impact of the economic downturn,” Chief Executive Officer Steve Ballmer said in a e-mail to staff obtained by Bloomberg News. Redmond, Washington-based Microsoft will, “if necessary, take further actions on our cost structure including additional job eliminations.”

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The Bank of England said it will increase bond purchases to give the British economy a further push as it shows signs of emerging from the worst recession in a generation.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, will add 50 billion pounds ($75 billion) to its program of asset purchases. By the time it meets in August policy makers anticipate having spent a total of 125 billion pounds. The panel also left the key interest rate at a record low of 0.5 percent, the bank said today in London.

Prime Minister Gordon Brown’s government has authorized King to print a total of 150 billion pounds to stave off deflation in an economy where gross domestic product dropped the most since 1979 in the first quarter. Lloyds Banking Group Plc said today that “difficult economic conditions” will persist for a year or more, exacerbating the bank’s corporate bad loans.

“It’s a surprise,” said George Buckley, chief U.K. economist at Deutsche Bank AG in London. “Clearly the bank was concerned about the possibility of the market not knowing what the bank was going to do,” and “they want to avoid the risks of deflation at all costs.”

The yield on the 10-year note fell as much as 10 basis points after the announcement to 3.64 percent. The yield was 10 basis points higher on the day at 3.7 percent as of 12:56 p.m. in London.

Rate Survey

The unchanged interest rate was predicted by 60 of 61 economists surveyed by Bloomberg News. It’s still higher than the Federal Reserve’s benchmark, which is in a range of zero to 0.25 percent, and the Bank of Japan’s rate of 0.1 percent.

The European Central Bank cut its key rate by a quarter- point to 1 percent today. That matched the median forecast of 53 economists in a Bloomberg News survey. President Jean-Claude Trichet may say the bank will start using non-conventional tools at a press conference at 2:30 p free credit report.m. in Frankfurt.

King’s MPC shifted focus to raising the money supply as lower interest rates lost their potency. Investors have sought guidance on whether it would expand the plan from an initial 75 billion pounds as its effects showed signs of waning.

“The process of adjustment” in the economy “will continue to act as a significant drag on economic activity,” the bank said in a statement. Still, stimulus measures “should in due course lead to a recovery in economic growth” and “the timing and strength of that recovery is highly uncertain.”

Job Cuts

Unemployment rose to the highest level since Brown’s Labour Party came to power in 1997 in the three months through February. WSP Group Plc, the British engineering company that helped design New York’s Freedom Tower, said yesterday it will cut about 1,000 workers by the end of June to conserve cash.

The decision has “got to reflect the latest forecasts” due on May 13, said Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd. in London. “They are probably much more downbeat about the outlook for the economy.”

The recession has hurt Brown’s prospects. Just 12 percent of adults expect Labour to win the next national election, a poll published on April 30 by Web site PoliticsHome showed.

The worst may still be over for the economy, suggesting a case for the central bank to avoid printing its full allocation of money. U.K. manufacturing contracted at the slowest pace in eight months in April and an index of services industries jumped the most since 1999, surveys by Markit show.

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