Searching for growth in Europe, clarity in China

By Robin Emmott

BRUSSELS (Reuters) - The euro zone's struggle to avoid another recession will take centre stage in the coming week in the absence of major U.S. data, as investors mull whether the ECB's new asset-buying plan is a prelude to even more radical steps.

While data from China may give clarity on a pattern of uneven growth there, it is in Europe that the prospects for the economy are most uncertain, although a ceasefire in Ukraine could lift the mood and avoid new EU sanctions on Russia this week.

The euro zone's fragile economic recovery came to a halt in the second quarter, in marked contrast to the United States, where the economy grew robustly. Like many of its neighbours struggling to rebound from the debt crisis, Italy slipped into recession for the third time since 2008.

EU finance ministers and European Central Bank President Mario Draghi convene on Friday in Milan, where the ECB's latest move to help the economy and avoid deflation will be at the forefront of discussions.

The ECB stunned markets last week by cutting interest rates and announcing a plan to buy asset-backed securities from October, which Barclays described "as a clear first step into quantitative easing" - a U.S.-style bond-buying programme that could help the economy but divides the central bank.

Draghi said his aim was to expand the bank's balance sheet back to the heights reached in early 2012, which equates to a rise of around 50 percent or 1 trillion euros in new assets.

"This is going to be digested by the markets over the coming weeks," said Thomas Harjes, an economist at Barclays.

"There's now a 50-50 chance that the ECB will go further and announce a sovereign bond-buying programme by year-end, or the beginning of 2015," he said.

Under its statutes, the ECB is banned from buying bonds directly from governments but can find ways to purchase them from banks, for example, on the secondary market.

An inflation rate of just 0.3 percent, coupled with the lack of economic growth, has given new urgency to the bloc's search for growth. The ECB is urging governments to also do their part and enact ambitious structural reforms.

German trade, labour and industrial data during the week should show whether the second quarter's poor showing is part of a trend or a one-off. A euro zone confidence indicator for September will also be watched after August's unexpected slump.

CLUES TO U.S. "NORMALISATION"

The ECB's stimulus contrasts with developments across the Atlantic, where the U.S. Federal Reserve is gradually winding down its bond-buying programme as the economy improves and is beginning to think about tighter monetary policy.

Investors have little to get their teeth into in the coming week and the biggest U.S. data will be August's retail sales on Friday. With the jobs market lifting confidence, retail sales are seen up 0.3 percent after dropping in July.

The expected gain in the indicator's so-called control number, which corresponds most closely with the consumer spending component of gross domestic product, would be a welcome relief after spending dropped in July, leading some economists to temper their growth forecasts.

Still, U.S. job growth slowed down sharply in August as more Americans gave up the hunt for work, giving a cautious Federal Reserve more reasons to wait a bit longer before raising rates.

The Fed's chair, Janet Yellen, is concerned about slow wage growth, the high numbers of Americans working part-time even though they want full-time employment and a long spell of joblessness following the 2008/2009 financial crisis.

"Such weakness plays into the hands of the Fed doves," said Rob Carnell, an economist at ING, of the August job data. "It gives Yellen more leeway to stand firm against the hawks, many of whom are calling for a change in the Fed's language on the likely timing and scale of policy normalisation."

Normalisation refers to the end of an unprecedented period of cheap money since the financial crisis. The consensus has been for a rate hike in late 2015, but economists are bringing forward their forecasts to near the middle of next year.

UNEVEN CHINESE EXPANSION

In Asia, the central banks of South Korea, Indonesia and the Philippines hold monetary policy meetings this week.

Another cut in Korea after August's 25 basis-point reduction is not expected this month, however. The monetary authority has been reluctant to cut rates more for fear that lower borrowing costs could swell the ageing society's large household debt.

Meanwhile, the People's Bank of China has so far refrained from cutting interest rates, preferring instead to ease liquidity for some banks to free funds for lending. Beijing in turn has tried to ease conditions in the property market.

Data on money and credit supply during the week will give an indication about the central bank's next moves following inconclusive data last week.

Activity in China's vast factory sector cooled in August as foreign and domestic demand slowed, spurring new calls for more policy easing to prevent the economy from stumbling once more.

But China's services sector rebounded in August after a drop in July, offseting factory-sector weakness and letting the government stick with its policy stance.

"The economic expansion is quite uneven, as exports accelerate, investment slows, and the real estate correction intensifies, but on balance, headline real GDP growth is probably a bit faster to the third quarter," said Bill Adams, an economist at PNC Financial Services Group.

(Reporting by Robin Emmott; Editing by Hugh Lawson)