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Companies will begin slowly adding to their payrolls in 2010, according to an annual White House review of the economy.

The White House Council of Economic Advisers, which on Thursday released a 462-page analysis of the president’s economic initiatives, said that the unemployment rate will be at 10% during 2010. It is now at 9.7%.

"With millions of Americans still unemployed, much work remains to restore the American economy to health," the report said. "It will take a prolonged and robust GDP expansion to eliminate the large jobs deficit that has opened up over the course of the recession."

On a call Wednesday with reporters, Council Chairwoman Christina Romer said she expects an average of 95,000 jobs a month to be created this year, and that the nation’s GDP will expand at a 2.5% rate.

The report, which is delivered to Congress, looks at the actions President Obama took to deal with the recession over the past year. It also discusses the economic challenges that lie ahead for the nation, but offers little insight that’s new.

Overall, the analysis enthusiastically supports the administration’s handling of the economic crisis and its proposals to strengthen the country’s fiscal standing in the future.

Romer called the report "a page-turner" and noted that it’s available for download to Kindle and other e-readers.

Placing blame

The report places blame on the Bush administration for running up debts and cutting taxes.

Romer blogged about the study on WhiteHouse.gov. "Largely because of two tax cuts, two wars, and a major new Medicare drug benefit that were not paid for, the budget surpluses of the 1990s had been replaced by substantial actual and projected future deficits long before the recession began at the end of 2007," she wrote.

She also took another whack at Obama’s favorite new target: Wall Street.

"Much of the economic growth that the United States experienced in the past decade was fueled by consumers and the government running up large debts, aided by a financial system better at making short-term profits than managing long-term risks," she wrote business cards.

Republicans were quick to react the report, calling it fluff and noting that the report says that unemployment won’t fall back to its 2008 level for another seven years.

"The Obama Administration’s report is full of blame for the policies of years past, praise for its own failed policies of the past year, and promises about their ideological agenda to grow government, said Rep. Eric Cantor, R-Va., the House GOP whip. "Instead of praising themselves and blaming others, a greater focus on small businesses and smart solutions to reduce uncertainty and create jobs would be welcomed and is long overdue."

Praising policies

The report has kind words for the $862 billion American Recovery and Reinvestment Act, the centerpiece of Obama’s economic policy in his first year. Calling the program the "great unsung hero of the past year," Romer reiterated that the program has funded up to 2 million jobs and helped turn the economy around.

Going forward, the report highlights several areas of financial concerns. These include health care, the deficit, living standards, business investment and trade, climate change and financial regulation. As consumers spend less, the government must foster an atmosphere which allows companies to ramp up their investments and exports.

The report lays out the administration’s proposals to address these issues.

Obama has made job creation his central focus in his second year in office. He has recently traveled the country promoting tax credits for small businesses, the source of many new hires. And on Tuesday, he brought together congressional leaders to push for a bipartisan agreement on legislation to boost hiring. 

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Federal Reserve Chairman Ben Bernanke, just days ahead of his confirmation hearing, is warning Congress that actions limiting the central bank’s independence could prove detrimental to the causes of financial reform and economic recovery.

In an op-ed piece to be published in Sunday’s Washington Post, Bernanke criticizes two moves aimed at limiting the Fed — a proposal in the Senate to strip the central bank of its bank regulatory powers and a House Financial Services Committee vote to audit monetary policy deliberations and actions.

"These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States," Bernanke wrote.

Bernanke says the congressional moves are a byproduct of the public frustration over the financial crisis and the government’s response, especially the bailout of large banks. (Fed rage boils on Capitol Hill)

"The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society," he wrote.

But the Fed chairman says that, while reforms are needed, "we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation."

Among the ideas he supports is development of a special bankruptcy procedure for firms "whose disorderly failure would threaten the integrity of the financial system — to ensure that ad hoc interventions of the type we were forced to use last fall never happen again."

Bernanke’s column comes ahead of a Senate Banking Committee hearing, scheduled for Thursday, considering his nomination for a second term as Fed chairman. President Obama announced the nomination in August.

The last sentence of his commentary is likely to be the theme he and his supporters will stress during the hearing.

"Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation," Bernanke wrote. 

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Confidence among U.S. consumers rose more than forecast in September as the pace of job losses slowed and the economy showed signs of pulling out of the recession.

The Reuters/University of Michigan preliminary index of consumer sentiment increased to 70.2 this month from 65.7 in August. The index was forecast to rise to 67.5, according to a Bloomberg survey of economists. A government report today showed inventories at U.S. wholesalers fell in July as higher sales helped distributors reduce excess supply.

Americans are starting to grow more upbeat after suffering the biggest destruction of wealth on record from a slump in stocks and home prices and companies are ramping up production to replenish stockpiles. Consumers may still be wary of increasing the spending that makes up 70 percent of the economy as they focus on building savings and paying down debt.

“We can be encouraged that consumer sentiment is healing,” said Jonathan Basile, an economist at Credit Suisse Holdings USA Inc. in New York, which at 70 had the closest forecast in the Bloomberg survey. “Good news continues to come through, bad news continues to diminish. It’s better, but it’s not good yet.”

The University of Michigan measure of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars and homes, rose to 71.8 from 66.6.

The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, increased to 69.2 from 65 in August.

Stocks Fell

Stocks fell after the reports. The Standard & Poor’s 500 Index closed down 0.1 percent from yesterday at 1,042.73 in New York. Earlier, the index had gained as much as 0.4 percent.

Gap Inc., Limited Brands Inc. and American Eagle Outfitters Inc. on Sept. 3 reported smaller August sales declines than analysts had forecast. San Francisco-based Gap, which also operates Old Navy and Banana Republic stores, said sales at outlets open at least a year fell 3 percent. Limited said its sales dropped 4 percent and American Eagle reported a 7 percent decline.

Starbucks Corp., the world’s largest coffee shop operator, said Sept. 9 it is removing 30 U.S. stores from a list of locations it planned to close after sales and profits improved. The Seattle-based company had planned to shutter about 800 U.S. stores and about 160 international cafes.

Wholesale Inventories

A Commerce Department report showed wholesalers’ stockpiles fell by a greater-than-forecast 1.4 percent in July, after a revised 2 free credit reports.1 percent drop in June. Wholesale inventories have had the longest series of declines since records began in 1987. Sales rose 0.5 percent, the third straight gain.

Investment in new equipment and other orders for long- lasting items may help boost U.S. gross domestic product and lead the economy out of the recession, President Barack Obama’s chief economist said today.

“I’m very encouraged by what we’re seeing, for example, in those advanced durable goods orders,” Christina Romer, chairman Christina Romer, chairman of the White House’s Council of Economic Advisers, said in an interview on Bloomberg Television. “Eventually, firms are going to say we need workers to produce these things.”

A Labor Department report today showed prices of goods imported into the U.S. rose in August for the fifth time in six months, led by petroleum costs. Prices excluding fuels rose 0.4 percent. Export prices rose 0.7 percent, indicating overseas demand is also starting to recover.

Growth Forecasts

The U.S. this quarter will emerge from the worst recession since the 1930s, economists say. The economy will grow at a 2.9 percent annual rate from July through September, according to the median of 61 estimates in a monthly Bloomberg News survey.

A Labor Department report last week showed the pace of job losses slowed in August, even as the unemployment rate rose to a 26-year high of 9.7 percent. Companies cut payrolls by 216,000 workers, after a 276,000 drop in July.

The number of Americans filing first-time claims for jobless benefits dropped last week to the lowest level since July, the Labor Department said yesterday. Applications fell by 26,000 to 550,000 in the week ended Sept. 5.

The economic recovery will probably be “lackluster,” hobbled by strains in financial markets and weak consumer spending, Federal Reserve Bank of Atlanta President Dennis Lockhart said yesterday.

The Federal Reserve said Sept. 9 that 11 of its 12 regional banks reported signs of a stable or improving economy in July and August. Five districts, including San Francisco, home to the biggest regional economy, “mentioned signs of improvement,” the Fed said in its Beige Book business survey.

Even so, “consumer spending remained soft in most districts,” according to the Fed report. “Loan demand was described as weak, and many districts reported that credit standards remained tight.”

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Group of 20 finance ministers agreed to maintain economic stimulus measures after U.K. Prime Minister Gordon Brown warned against a premature end of emergency spending and rescue programs.

“It would be an error of historic proportions if we were to repeat the errors of the 1930s,” Brown told finance ministers at the opening of a meeting in London today. “The risks still very much remain. To start now reversing the extraordinary measures would be a serious mistake.”

Ministers agreed to continue emergency aid to their economies as they plan exit strategies for withdrawing it, according to a German official, who spoke on condition of anonymity because the talks aren’t complete.

The policy makers arrived in the U.K. as a report in the U.S. signaled recovery will be sluggish. Unemployment reached a 26-year high in August even as the pace of job losses slowed. Such mixed signals are preventing them from declaring victory over the recession and peeling back record-low interest rates as well as $2 trillion in fiscal stimulus.

U.K. Chancellor of the Exchequer Alistair Darling and German Finance Minister Peer Steinbrueck were among the officials who began talks in London yesterday, saying it was too soon to unwind measures that Brown estimated were worth $5 trillion. They promised to start outlining how they will eventually do so.

Timing

“The time to start implementing an exit strategy is when you have seen the job through,” Darling said in an interview yesterday. “One of the biggest risks is saying the job is done, now we can throttle back. We have made those mistakes before.”

The International Monetary Fund raised its forecast for global growth next year to 2.9 percent from the 2.5 percent it predicted in July, a G-20 government official said. The Washington-based lender also reduced its projection for the global contraction this year to 1.3 percent, from a 1.4 percent drop, the official said on condition of anonymity, citing a paper prepared for the G-20.

Still, officials should start discussing how to remove the “enormous liquidity” in financial markets before it spurs inflation and government borrowing costs, Steinbrueck said auto loans.

“It’s necessary to prepare for a situation when the economic and financial crisis hopefully will be overcome,” Steinbrueck told reporters. “One can’t talk about the concrete point in time just yet.”

Crisis policies will have to stay in place for another six months, Russian Finance Minister Alexei Kudrin said in an interview in London yesterday.

Coordinating Plans

Countries should ultimately coordinate steps when the time comes to withdraw stimulus, French Finance Minister Christine Lagarde said. Failure to unite would risk fanning inflation, leading to uneven debt burdens and may distort markets.

“It should be done together,” Lagarde said. “What the timing will be for each country will depend on the fabrics of the economy, on the status of where it is, on its size. We must have this coordination amongst ourselves.”

Central bankers are also planning for the exit — without rushing toward it. European Central Bank President Jean-Claude Trichet yesterday used a speech in Frankfurt to outline how the ECB’s stimulus measures will eventually be taken back. Many of its loans to banks will “naturally unwind” as they mature and demand for additional cash wanes, he said.

‘Premature’

“Notwithstanding some recent signs of improvement in the economic outlook, it is premature to declare the financial crisis over,” Trichet said. “Stressing the importance of the exit strategy should not be confused with its implementation.”

The G-20’s policy makers are meeting through today to shape an agenda for a Pittsburgh summit of their leaders in three weeks. They will release a statement about 4 p.m. in London.

The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

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U.S. Treasury Secretary Timothy Geithner said the global economy probably will suffer setbacks during its recovery as nations adapt to a loss of wealth and a surge in public debt.

“This crisis has been brutal in the extent and severity of damage to economies around the world,” Geithner said in the prepared text of a speech in Jeddah, Saudi Arabia. “Given the extent of damage to financial systems, the loss of wealth, the necessary adjustments to a long period of excessive borrowing around the world, it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporary reversals.”

Economies will need to start growing again before jobs can be created, he said. He also said credit conditions will remain “unusually tight,” even though markets have opened up somewhat in response to government actions.

The U.S. yesterday reported a $1.1 trillion budget deficit for the fiscal year that began Oct. 1. Geithner’s visit to Saudi Arabia and the United Arab Emirates, two of the oil-exporting countries that are the fourth-largest holders of Treasury debt, comes as the U.S. braces for a projected 2009 budget deficit of $1.8 trillion, more than four times the previous fiscal year’s $459 billion shortfall.

“The U.S. needs to raise a lot of debt over the coming months and at a time when there’s talk about the dollar’s status as a reserve currency, they need to convince people that hold the debt that the U.S. is committed to fiscal responsibility in the medium term,” said Eric Swats, Dubai-based head of asset management at Rasmala Investments, which has about $1.2 billion under management, in an interview ahead of Geithner’s visit.

U.S. Borrowing

The U.S. Treasury chief sought to address both concerns in his prepared remarks. He pledged that the U.S. would take steps to rein in its borrowing while also attempting to address health care, financial regulation and other long-term issues.

“The United States was on an unsustainable fiscal path before this crisis, and we will not succeed in establishing sustainable recovery without a credible commitment to address our long term deficits,” Geithner said.

At the same time, the U.S. understands it has responsibilities as a leader of the global economy, he said.

“Given the dollar’s role in the international financial system and the significant impact of the U cash advance.S. economy on global economic conditions, we fully recognize that the United States has a special responsibility to play,” Geithner said.

Global Response

Around the world, governments have taken steps to combat the financial crisis that have “substantially reduced the risk of much deeper and more prolonged global recession,” Geithner said. He said he sees several indications of stabilization and improving confidence in the U.S., along with “initial signs” of global progress.

European economies are shrinking more slowly and there are similar signs in Japan, Geithner said. He also said China is helping other Asian economies after successfully using government policy to increase demand. Growth prospects also are improving in Brazil and other parts of Latin America, he said.

Geithner praised Saudi Arabia’s efforts to diversify its economy away from energy-related businesses. Later today, he is scheduled to visit the city of Yanbu to attend an economic development event with King Abdullah, the U.S. Treasury said.

“The world has yet to fully appreciate the scale of ambition and investment we are seeing in the Kingdom and the Gulf region to lay the foundation for future growth,” Geithner said. “You are diversifying your economies to build a future less dependent on oil and natural gas.”

Iran Sanctions

Geithner’s first visit to the Mideast as Treasury chief is aimed at explaining to allies and trading partners the state of the U.S. economy and shoring up their support for efforts to stop Iran’s nuclear program, stabilize Iraq and quell violence in Afghanistan, U.S. officials, who declined to be identified, said in a briefing last week.

Geithner is visiting the U.K., Saudi Arabia, the United Arab Emirates and France this week. In addition to possible new sanctions on Iran, he’ll also discuss the global economy, the upcoming Group of 20 summit in Pittsburgh, Pennsylvania, and efforts to prevent terrorism financing, the Treasury officials said in a briefing with reporters in Washington. In Abu Dhabi tomorrow, he’s also scheduled to meet with officials from two sovereign wealth funds.

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The Bank of England’s emergency bond-buying program may end next month as Britain’s worst recession in a generation eases, economists say.

Officials decided yesterday not to expand the 125 billion- pound ($203 billion) spending plan and said they will pause purchases of government bonds at the end of July. That suggests they may be preparing to wrap up the policy, said Credit Suisse Group AG, Citigroup Inc. and Fortis Bank Nederland Holding NV.

“We’re at a turning point,” said Nick Kounis, an economist at Fortis in Amsterdam and a former U.K. Treasury official. “We know the economy has probably stabilized. Even though they can’t see the effects of what they’re doing, they may be starting to worry about overkill.”

Bank of England Governor Mervyn King will assess the plan’s success in August and any decision to finish it would shift the focus of policy to the exit strategy. While some economists are concerned creating too much money to buy the bonds will spark inflation, officials stress they can contain those risks by offloading the debt they have bought and raising interest rates.

In the U.S., the Federal Reserve has already started rolling back measures set up to stave off a deeper recession. The Fed said last month it will let one emergency-lending program expire this year and trim two others.

Bond Drop

Gilts dropped and the pound rose when the Bank of England declined to push its purchase plan to the 150 billion-pound limit authorized by Gordon Brown’s government. The yield on the benchmark 10-year bond jumped the most in three months, climbing 17 basis points yesterday. It advanced a further 7 basis points to 3.85 percent today.

The pound, which advanced 1.6 percent yesterday, slipped 0.5 percent to $1.6261 as of 8:46 a.m. in London. The central bank also left its benchmark interest rate at a record low of 0.5 percent.

“Not extending the program this month makes it more likely they will stop it next month,” said Michael Saunders, chief western European economist at Citigroup in London. “Growth prospects are better and the inflation outlook is higher. This may be cordoning off their scope to keep going.”

The U.K. inflation rate fell less than economists forecast in May and is still above the bank’s 2 percent target. Policy makers predicted in their May 13 forecasts that the rate will drop below target and won’t return to it in two years.

The bank’s concerns about deflation may yet lead them to expand the purchase plan car loan. Philippe-Henri Burlisson, an investor at Groupama Asset Management in Paris, said the inflation outlook will be “key” in policy makers’ thinking.

‘Signs of Stabilization’

“For them to stop would mean that they are convinced the economy is doing better enough,” Burlisson said. “I have a hard time believing this.”

Bank of England Deputy Governor Charles Bean said June 24 that it appeared that “it looks like we may be around the trough” of the slump, and policy maker Andrew Sentance said that “there are signs of stabilization, but it doesn’t tell us how strong the recovery will be.”

Gross domestic product slumped 2.4 percent in the first quarter, the most in 50 years, and data since then have been mixed. House prices dropped 0.5 percent in June after jumping 2.6 percent the previous month, Halifax says. Manufacturing fell in May for the first time in three months.

British Airways Plc, which reported the biggest loss in its history in the quarter ended March 31, may face strikes as the airline pushes unions to accept almost 4,000 job cuts.

Taking Root

The economy’s contraction eased to 0.4 percent in the second quarter, the slowest pace in a year, according to an estimate by the National Institute of Economic and Social Research. The International Monetary Fund this week raised its U.K. forecast for 2010 to predict a return to growth.

If a recovery takes root, the central bank’s “biggest challenge” will be determining the exit strategy from its emergency plan, according to Adam Posen, deputy director at the Peterson Institute for International Economics in Washington, who will become a U.K. policy maker in September.

Economists say rate increases are unlikely this year. Citigroup’s Saunders predicts the bank will lift the rate in the second quarter of 2010. Fortis’s Kounis said policy makers will wait until the second half before raising it “gradually.”

“The economy isn’t strong but the extreme risks quantitative easing was addressing have diminished,” said Robert Barrie, chief U.K. economist at Credit Suisse in London, and a former Treasury official. “It is the beginning of the end for QE.”

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Japan’s consumer prices fell at a record pace in May, adding to the risk that deflation will become entrenched and hamper a rebound from the nation’s worst postwar recession.

Prices excluding fresh food slid 1.1 percent from a year earlier after dropping 0.1 percent in the preceding two months, the statistics bureau said today in Tokyo. It was the sharpest decrease since comparable figures were first compiled in 1971.

Bank of Japan Governor Masaaki Shirakawa said last week that price declines will accelerate through the middle of the fiscal year as demand slackens and crude oil continues to trade lower than last year’s record. Retailers including Aeon Co. are cutting prices to attract customers as falling wages and the worsening job outlook damp spending.

“Profits fall, then wages come down, then consumers stop shopping,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “And because people aren’t shopping, companies lower prices. That’s the process that we’re starting to see. It isn’t easy to break out of.”

The yield on Japan’s 20-year bonds fell half a basis point to 2.08 percent at the 11:05 a.m. break in Tokyo. The Nikkei 225 Stock Average rose 0.2 percent. The decline in prices matched the median estimate of economists surveyed by Bloomberg.

Worldwide inflation is easing as energy costs retreat and the worst global recession since the Great Depression forces companies to charge less. Consumer prices failed to rise in the euro area for the first time in at least a decade in May, and in the U.S. they fell 1.3 percent, the most since 1950.

Hard Sell

“With demand deteriorating, companies are finding it more difficult to sell goods and services and are turning to discounting,” said Azusa Kato, an economist at BNP Paribas in Tokyo.

Some 47 percent of 775 Japanese retailers surveyed by the Nikkei newspaper plan to lower prices in the year ending March 2010 to spur sales, up from 9 percent a year earlier. Aeon, Japan’s second-largest retailer, this week started a discount campaign for confectionary, drinks and mayonnaise.

Consumers, whose spending accounts for more than half of the economy, may delay purchases if they expect goods to get cheaper. That would erode profits and force companies to cut wages, which have already slid for 11 months. Japan only escaped from a decade of deflation in 2005.

Finance Minister Kaoru Yosano said an “extreme” slump in demand and production are causing the drop payday loans. “We continue to monitor developments in prices and need to carefully manage the economy to avoid a deflationary spiral,” he said.

Jun Saito, chief economist at the Cabinet Office, said in an interview that price declines “will exert a significant amount of downward pressure on the recovery.”

OECD’s Advice

The Organization for Economic Cooperation and Development this week urged the Bank of Japan to keep pumping cash into the economy “until underlying inflation is firmly positive.” Since it cut the key interest rate to 0.1 percent in December, the central bank has been buying corporate debt and increased government bond purchases from lenders to revive growth.

Central bank board member Hidetoshi Kamezaki said this month that receding expectations of price increases “could lead to a deflationary spiral, which is very dangerous.” Some 22 percent of consumers anticipate prices will be lower a year from now, the most since the government began asking the question in 2004.

“The Bank of Japan is clearly worried about the risk of deflation, not inflation, and an exit from its low-rate policy is still far away,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

Tokyo Prices

Even when excluding food and energy, consumer prices fell 0.5 percent in May, the fastest pace in 22 months, the statistics bureau said. Core prices in Tokyo, a harbinger of nationwide price trends, fell 0.7 percent in June from a year earlier, the biggest drop in six years.

“The economy’s deterioration will exacerbate downward pressure on prices,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “Core price declines will probably exceed 2 percent in the July-September quarter.”

Core prices, the central bank’s key gauge of inflation, will slide 1.5 percent this fiscal year and 1 percent in the next, Governor Shirakawa and his board forecast in April.

Crude oil has lost about half of its value since peaking at $147.27 a barrel in July. Wheat, soybeans and corn costs have dropped after climbing to records last year.

Wholesale prices fell at the fastest pace in 22 years in May and corporate-service prices slid a record 3 percent.

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German exports fell more than economists forecast in April as the global crisis restrained demand, keeping Europe’s largest economy mired in a recession.

Sales abroad, adjusted for working days and seasonal changes, fell 4.8 percent from March, when they rose a revised 0.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists expected a 0.1 percent decline in April, according to the median of 10 estimates in a Bloomberg News survey.

“The world is still adjusting to the burst of the credit boom and this kind of hangover won’t be gone in a couple of months,” said Thorsten Polleit, chief German economist at Barclays Capital in Frankfurt. “The global economy is still lackluster.”

German companies from chemical makers to car manufacturers have seen demand fall as the global economy contracts. While Bundesbank President Axel Weber said June 5 that central bank policy has helped to slow the pace of the economic slump, the outlook “remains uncertain.” Volkswagen AG’s Audi division said yesterday it may need to push back a 2015 sales target as customers withhold purchases of luxury vehicles no teletrak payday loan.

German imports dropped 5.8 percent in April from the previous month, when they increased a revised 0.2 percent, the statistics office said. The trade surplus narrowed to 9.4 billion euros ($13.1 billion) from 11.3 billion euros.

The surplus in the current account, the measure of all trade including services, was 5.8 billion euros, down from a revised 11.0 billion euros.

The European Central Bank has cut its key interest rate to a record low of 1 percent and pledged to buy 60 billion euros of covered bonds starting next month in an effort to revive lending. President Jean-Claude Trichet said on June 4 that he expects the slump in the euro-area economy to ease in the current quarter after a “sharp fall in global demand and trade” affected the region in the first quarter.

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Australia’s economy unexpectedly grew in the first quarter, skirting the global recession that has swamped the U.S., the U.K. and Japan, as exports and consumer spending increased.

Gross domestic product rose 0.4 percent in the three months to March 31 after it contracted a revised 0.6 percent in the fourth quarter, the Bureau of Statistics said in Sydney today. The median estimate of 18 economists surveyed by Bloomberg was for a 0.2 percent decline.

Stocks rose and the nation’s currency jumped to the highest in eight months as the report confirmed Australia is one of only a few economies including China and India that expanded last quarter. Record interest-rate cuts and more than A$12 billion ($9.9 billion) in government cash handouts to consumers fueled growth even as businesses slashed investment spending.

“Rumors of the death of the Australian economy have been highly exaggerated,” said Craig James, chief equities economist at Commonwealth Bank of Australia in Sydney.

“Much of the credit for Australia’s resilience must be given to the swift actions of the Reserve Bank and government in stimulating our economy.”

The Australian dollar rose to 82.40 U.S. cents at 1:07 p.m. in Sydney from 81.91 cents before the report was released.

Stocks Rise

The S&P/ASX 200 stock index increased 1 percent, paced by shares of Australia’s largest telephone company, Telstra Corp., which gained 2.3 percent. Furniture retailer, Harvey Norman Holdings Ltd., rose 5.8 percent.

Consumer spending advanced 0.6 percent in the quarter, adding 0.3 percentage points to GDP, today’s report showed. Government spending rose 0.3 percent and exports increased 2.7 percent.

Still, parts of the economy remain weak. Business investment tumbled 6.1 percent and imports fell 7 percent as companies such as Rio Tinto Group cut spending and fired workers. Car sales dropped 14.9 percent in May from a year earlier, the Federal Chamber of Automotive Industries said today.

“We’re not out of the woods yet,” said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney. “Technically we have skirted recession, but the underlying details in the data aren’t painting a great picture.

‘‘We’ve got investment falling and imports tanking, which is symptomatic of weaker investment, and households are being artificially supported by government cash handouts.”

Government Spending

Prime Minister Kevin Rudd, who said in April that the country’s economy is in its first recession since 1991, began distributing cash handouts of as much as A$900 in March to low- and middle-income earners.

“It’s been the right strategy under very difficult global conditions,” Rudd told reporters in Canberra today. Still, “difficulties and obstacles lie ahead.” Unemployment will rise and “there is no guarantee that GDP won’t fall in future Internet Payday loans.”

The jobless rate has climbed to 5.4 percent in April from 3.9 percent in February 2008 as companies such as Qantas Airways Ltd. fired workers.

Among evidence that Australia is weathering the global slump, building approvals jumped twice as much as economists forecast in April, new homes sales gained for a fourth month and the current account deficit narrowed in the first quarter as agricultural exports surged.

Today’s report showed rural exports jumped 18.3 percent in the quarter. Wheat output rose to 21.4 million tons in 2008-2009, the biggest crop in three years, from about 13 million tons a year earlier, according to the Australian Bureau of Resource and Agricultural Economics.

Retail sales rose in the first quarter and again in April.

‘More Resilient’

Woolworths Ltd., Australia’s largest retailer, said last month that sales surged 6.5 percent to A$12.3 billion in the three months ended April 5. Caltex Australia Ltd., the nation’s largest oil refiner, said on April 23 that first-quarter operating profit gained 11 percent.

“It’s good for confidence that we’ve avoided that technical recession,” defined as two consecutive quarters of declining GDP, said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. Today’s GDP figures “indicate Australia is much more resilient than many other economies.”

The economy grew 0.4 percent from a year earlier. Economists forecast a 0.4 percent contraction.

By contrast, Japan’s economy shrank 9.7 percent in the year, the U.K.’s GDP dropped 4.1 percent, the 16-member euro region contracted 4.6 percent and the U.S. slid 2.5 percent. The economy of China, Australia’s largest trading partner, grew 6.1 percent and India expanded 5.8 percent.

Interest Rates

The global turmoil, triggered by last year’s collapse of Lehman Brothers Holdings Inc., prompted Reserve Bank Governor Glenn Stevens to slash the overnight cash rate target between September and April by a record 4.25 percentage points.

Stevens left the rate unchanged at 3 percent yesterday for a second month and signaled that he is prepared to cut borrowing costs from a 49-year low to spur domestic demand “if needed.”

“The prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy,” Stevens said.

Investors expect Australia’s overnight cash rate target will be higher in 12 months, according to a Credit Suisse Group AG index based on swaps trading.

Traders forecast the benchmark will be 24 basis points higher in 12 months, the index showed at 12:39 p.m. in Sydney. At the start of May, they tipped 37 basis points of cuts. A basis point is 0.01 percentage point.

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Treasury Secretary Timothy Geithner called for an overhaul of compensation practices at financial companies and said the Obama administration’s plan to help realign pay with performance will be rolled out by mid-June.

“I don’t think we can go back to the way it was,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be aired tonight and over the weekend. “We’re going to need to see very, very substantial change.”

He said that Wall Street’s pay practices encouraged taking on short-term risk, and helped precipitate the financial crisis. What’s needed is a set of broad standards that federal regulators can use to make sure that doesn’t happen again, he said.

The administration’s pay plan would be part of a proposed comprehensive overhaul of financial regulation aimed at both protecting consumers and reducing vulnerability to crises. Geithner has previously ruled out setting specific caps on pay and declined to alter existing compensation contracts.

In a wide-ranging interview, the Treasury chief declined to say whether the administration would propose stripping the Securities and Exchange Commission of some of its powers as part of the plan and dismissed suggestions of a rift with Federal Deposit Insurance Corp. Chairman Sheila Bair.

Geithner, 47, shied away from declaring the financial crisis over, saying that credit is still "tight" and interest rates are still "high" for many business borrowers. He forecast that will improve gradually as companies and consumers reduce their debt levels to sustainable levels.

Recovery Process

“That’s going to make the process of recovery somewhat slower than it would otherwise be,” he added.

The Treasury chief said it was a “real concern” that some banks that received money from the government will rush to pay it back, impinging on their ability to increase lending. To discourage that from happening, banks that want to repay must show they have more capital than regulatory guidelines call for, and are able to raise money from the private sector “on a substantial scale” without government help, he said.

Geithner told lawmakers earlier this week that every $1 of capital at banks can generate more than $8 of lending. Still, he said in the interview that the Treasury won’t require that banks commit to specific increases in their lending as a precondition for paying the government back.

‘Deep Trouble’

“Lots of countries have got themselves in deep trouble with policies that force their banks to lend,” he said. “That’s likely to lead to a weaker, less efficient banking system, a less efficient economy.”

The government has distributed almost $300 billion in capital to about 600 U.S. banks and financial firms under the $700 billion financial rescue package approved by Congress last year. A number of lenders, including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, have applied to repay the government funds.

Geithner is under pressure to institute a new set of rules this year for the financial-services industry.

“No one bails out little grocery stores,” U health insurance.S. Representative Jose Serrano, a Democrat from New York, told the Treasury chief at a hearing in Washington yesterday.

As part of its efforts to combat the crisis, the Treasury is putting together a Public-Private Investment Program to purchase as much as $1 trillion in distressed mortgage-backed securities and other assets from the banks. The partnerships would use $75 billion to $100 billion of government funds.

Bank Pressure

Geithner signaled he wouldn’t be concerned if the program doesn’t reach hundreds of billions of dollars within a few months. He declined to say whether banks should be pressured to participate, as Bair has suggested.

“We want to get these programs in place and see how they work,” he said. “They can be helpful and valuable in putting a floor under things, even if they don’t see a lot of early participation.”

Geithner said the credit crisis reflected “systematic failures” in financial oversight that would require “pretty significant changes across the board.” Among the changes the administration is considering is the establishment of an independent agency tasked with consumer protection.

The SEC may be stripped of some of its powers under the regulatory restructuring plan being put together by Geithner and National Economic Council Director Lawrence Summers, people familiar with the matter have said. In one scenario, the agency would lose its oversight of mutual funds to a new agency for policing consumer-finance products.

SEC Resources

Geithner praised SEC Chairman Mary Schapiro and said he would support giving her agency more resources where needed. He declined to say whether he thought the SEC should lose oversight of mutual funds as part of the overhaul.

He also said the administration is working with top lawmakers to craft a new regulator that would police risk across the financial system. He said no judgments have been made yet about who would fill that task, or what the roles of the Federal Reserve and Treasury will be. A “white paper” on the subject is due in several weeks, he said.

The Treasury chief brushed off suggestions that he and Summers were at odds with the FDIC’s Bair and that the two didn’t consider her a team player. He called Bair “very creative” and said that he had worked "very closely" with her.

“One of her great strengths is she’s a strong advocate for her agency and strong advocate of her points of view,” Geithner said. “That’s the kind of thing that everybody wants around the table, including Larry Summers.”

The Treasury chief belittled charges by former House of Representatives Speaker Newt Gingrich and other Republican leaders that President Barack Obama was adopting a "socialist" agenda. While markets can’t solve all America’s problems, the administration recognizes their importance, he said.

“It’s the least plausible charge anybody could say,” Geithner said. “The president understands how important markets and businesses are to the future prosperity of the U.S.”

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