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The U.K.’s unemployment rate would be almost double and its recession would have been deeper if Britain had joined the euro, according to the Centre for Economics and Business Research.

Gross domestic product would have contracted 7 percent last year and unemployment would currently be 15 percent if the nation had signed up to the single currency, CEBR’s Chief Executive Officer Douglas McWilliams said today in an e-mailed statement. The economy shrank 4.8 percent last year.

At 7.8 percent, the U.K. jobless rate is below that of the U.S. and the average of the euro region, which are both at 10 percent. Prime Minister Gordon Brown decided to keep Britain out of the European single currency when he was finance minister in 2003 after an assessment of the potential benefits of joining. Many euro members have struggled, McWilliams said personal business card.

“Most European economies have found keeping up with a German-inspired exchange rate a problem,” he said. “For those European countries that have a propensity to borrow, a single interest rate, kept low by frugal Germany, was a step too far and they over borrowed. Ireland and Spain are the most spectacular examples, but Portugal and Greece also had interest rates that were far too low for their economic circumstances.”

If the U.K. had joined the euro in 1998, economic growth would have been “slightly higher” and inflation would have been faster by about 0.6 percent through 2006, McWilliams said.

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The Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as $1 trillion from the financial system as policy makers prepare for the first interest-rate increase since June 2006, according to a person familiar with the discussions.

The central bank is looking to the money-market mutual fund industry which manages $3.2 trillion in assets because the 18 so-called primary dealers that trade directly with the Fed have a capacity limited to about $100 billion, estimates Joseph Abate, a money-market strategist at Barclays Capital in New York.

Money-market funds may welcome the opportunity to trade with the Fed after the financial crisis reduced the supply of safe assets in which they can invest. In one example of demand for such assets, auctions on four-week Treasury bills have attracted an average of $5.47 in bids for every dollar sold this year, compared with an average of $3.77 last year, according to Bloomberg data. Yields on the four-week bill were quoted at four basis points at 3:47 p.m. in New York trading from 18 basis points a year ago.

“There are lots of great credit stories, but the option of going with the Fed and the government — it takes away part of the risk,” said Deborah Cunningham, a chief investment officer at Federated Investors Inc. in Pittsburgh, which manages $318 billion in money-market investments. Conversations with the Fed “seem pretty positive,” she said, adding that the Fed and the industry should be in a position to conduct operations before the end of the year.

Fannie, Freddie

Chairman Ben S. Bernanke yesterday charted ways the Fed might withdraw record monetary stimulus pumped into the economy to fight the recession. Among the central bank’s tools are reverse repurchase agreements, in which the Fed sells securities with the intention of repurchasing them at a later date.

The Fed is also considering reverse repurchase agreements with mortgage lenders Fannie Mae and Freddie Mac, said the person familiar with the discussions. Freddie Mac spokeswoman Sharon McHale declined to comment. Fannie Mae spokesman Brian Faith also declined to comment.

“To further increase its capacity to drain reserves through reverse repos,” Bernanke said, the Fed is “in the process of expanding the set of counterparties with which it can transact” beyond primary dealers of government securities.

The primary dealers, which are required to bid at auctions of Treasury notes and trade directly with the New York Fed’s markets desk, include BNP Paribas Securities Corp., Banc of America Securities LLC and Goldman Sachs & Co.

‘Extended Period’

Bernanke repeated yesterday that while interest rates are likely to stay low for an “extended period,” the Fed in “due course” will need to “begin to tighten monetary conditions to prevent the development of inflationary pressures paydayloan.”

The central bank has created more than $1 trillion in excess reserves in the banking system through its purchases of $300 billion of Treasury debt and $1.25 trillion of mortgage- backed securities. To put upward pressure on the federal funds rate, the Fed may need to drain as much as $800 billion, Abate estimates.

One potential tightening tool is the interest rate on reserves that commercial banks keep on deposit at the Fed. By raising that rate, the central bank “will be able to put significant upward pressure on all short-term interest rates,” Bernanke said.

The Fed can also use reverse repos to shrink the quantity of reserves, which in turn gives it “tighter control over short-term interest rates,” he said.

Risk for Fed

Fed officials face the risk that when they start to tighten policy by raising the rate they pay banks on reserves, other market rates may not follow. That would keep monetary conditions too loose in an expansion.

“They still seem nervous that they might not be able to control short rates, and if they can’t control short rates, how do they tighten?” said Mark Spindel, chief investment officer at Potomac River Capital LLC, which manages $200 million in Washington.

The Fed has sought to keep the benchmark rate in a range of zero to 0.25 percent since December 2008. The federal funds rate is now 0.13 percent, even though banks can earn 0.25 percent by keeping their money on deposit at the Fed.

One reason for the discrepancy is that Fannie and Freddie have become “significant sellers” of funds in the overnight market and aren’t eligible to place cash on deposit at the Fed, according to a December research paper by the New York Fed.

Some hurdles remain in the Fed’s efforts to secure bigger repo capacity. Fed officials and mutual-fund industry representatives are working on a structure that would allow funds to invest in relatively liquid assets that can be sold in seven days, while allowing the central bank to avoid having to renew billions of dollars in transactions each week.

“There needs to be liquidity,” said Cunningham of Federated. “A reverse repo contract is not considered to be liquid in the context of anything beyond seven days.”

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European Central Bank President Jean- Claude Trichet is struggling to convince investors that the euro region shouldn’t be punished for Greece’s budget problems.

As the Greek government tries to control its record deficit and the country’s bonds slide, Trichet yesterday said the economy of the 16-nation euro area is solid and its budget shortfall will probably be smaller than those of the U.S. and Japan this year. The euro nevertheless fell more than half a cent against the dollar and Spanish and Portuguese stocks dropped on concern they are in a similar predicament to Greece.

Trichet “did not convince me,” said Stuart Thomson, who helps manage $100 billion at Ignis Asset Management in Glasgow, Scotland. “Where does he think the Greek, Spanish and Portuguese economies will be three years from now? Their austerity measures will weigh on the euro area as a whole.”

Trichet has been forced to fend off questions about the survival of the euro as investors doubt Greece’s ability to cut its deficit from 12.7 percent of gross domestic product to below the European Union’s 3 percent limit. As concern spreads to Spain and Portugal’s rising debt burdens, Trichet will try to stress the need for fiscal prudence without inflaming skepticism that it can be achieved.

“Something has to happen to turn credibility around,” said Paul Mortimer-Lee, head of Market Economics at BNP Paribas in London. “The market’s just saying it’s not believable. It might have to get worse before it gets better.”

Markets Shudder

Spanish stocks dropped the most in 15 months yesterday and Portugal led declines in government bonds. The euro fell to $1.3728, its lowest level against the dollar since last May. It has dropped more than 9 percent since Nov. 25.

Greek bonds have tumbled in the past two months, pushing the yield on the country’s 10-year debt above 7 percent, the highest since 1999, the year the euro was introduced. The premium investors charge to hold Greek 10-year bonds over the benchmark German bund has widened to 356 basis points, about 10 times what it was two years ago.

The ECB yesterday left its benchmark rate at a record low of 1 percent and Trichet signaled the bank is in no rush to raise borrowing costs as the economy recovers gradually from its worst recession since World War II.

Still, Trichet said the “solidity” of the euro area “is not necessarily very well known” and its situation compares “very flatteringly with a number of other industrialized countries.”

Gradual Recovery

The euro-area economy will grow 0.8 percent this year and 1.2 percent in 2011, according to the ECB’s December forecasts. It contracted 4 percent last year, the European Commission estimates.

“Trichet is still trying to persuade markets that they should be looking at the euro area as a whole, which does not look that bad, rather than at individual countries, some of which look extremely fragile,” said Marco Annunziata, chief economist at UniCredit SpA in London.

Spain’s public debt will rise to 74 percent of GDP by 2011 from 54 percent last year, according to European Commission forecasts. Greece’s debt will increase to 135 percent of GDP from 113 percent, and Portugal’s will increase to 91 percent from 77 percent, the EU estimates.

Greece’s consolidation plans, which call for about 10 billion euros ($13.7 billion) of spending cuts and revenue increases this year, are more ambitious than any budget reduction achieved by euro-region countries since the 1970s, according to ING Group.

Greece’s biggest union yesterday approved a second mass strike this month to protest the spending cuts and tax collectors began a 48-hour walkout, illustrating the difficulty Prime Minister George Papandreou faces in implementing his plan.

“We expect and we are confident that the Greek government will take all the decisions that will permit them to reach that goal,” Trichet said. Additional proposals announced by Greece this week to freeze public-sector wages and revamp the pension system “are steps in the right direction,” he said.

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Spain’s unemployment rate, the highest in the euro region, rose more than economists expected in the fourth quarter, threatening to delay recovery from the worst recession in six decades.

The jobless rate rose to 18.8 percent from 17.9 percent in the previous quarter, the National Statistics Institute said today in an e-mailed statement. The active population fell as immigrants left the labor market. The rate had been expected to climb to 18.5 percent, according to a Bloomberg News survey of five economists.

Reeling from the collapse of a debt-fueled construction boom as well as the global crisis, Spain’s unemployment rate has more than doubled in two years and joblessness among young people has surged beyond 40 percent. The greatest job losses in the euro region are eroding support for the Socialist government of Prime Minister Jose Luis Rodriguez Zapatero, re-elected in 2008 on pledges of full employment, even after his stimulus programs put more than 400,000 people back to work.

“This is going to make the recovery more difficult,” said Estefania Ponte, an economist at Fortis Bank in Madrid. “The most important factor for private consumption is the labor market, and if there’s no improvement in the labor market, it’s very difficult for consumption to recover.”

Construction Workers

About half a million construction workers joined the jobless ranks in the two years to December as the decade-long building boom came to an end, Labor Ministry data show. Ford Motor Co. announced 600 job cuts last year in Spain, once the motor of job creation in the euro region, and olive-oil bottler SOS Corporacion Alimentaria SA also reported plans for layoffs.

The government’s 8 billion-euro ($11.2 billion) works program, which employed builders to widen sidewalks and install cycle routes, ended last month and is being replaced this year with a program half its size. Monthly jobless figures for January will be published on Feb. 2.

“It’s quite a risk,” said Giada Giani, an economist at Citigroup Global Markets in London, who expects unemployment to reach 20 percent this year. “With no pickup in employment, wages slowing and inflation picking up, the overall impact on real disposable incomes for households is likely to be felt more in 2010 than last year.”

People’s Party Gains

The opposition People’s Party extended its lead over the ruling Socialists and would win 43.6 percent of the vote if elections were held now, a poll published in El Mundo newspaper showed on Jan. 2. Unemployment is Spaniards’ main concern, according to the latest survey from the state-run Center for Sociological Research.

While the International Monetary Fund expects the 16-nation euro area, the U.S. and the U.K. to expand this year, it forecasts Spain will contract 0.6 percent in 2010. The budget deficit probably grew to 11.2 percent of economic output in 2009, according to a European Commission forecast, as job losses mounted and the government extended benefits for the long-term unemployed.

The Cabinet today plans to discuss spending cuts of as much as 50 billion euros by 2013, the deadline set by the commission to bring the shortfall within the EU’s 3 percent limit, said an official at the prime minister’s office who declined to be named in line with policy.

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OTTAWA–Canadian businesses reported near record optimism about their future sales and say they are stepping up plans to hire more workers and invest, the Bank of Canada said Monday.

Seventy per cent of executives said sales growth will quicken over the next year, while another 21 per cent expect it to slow, the bank said in a quarterly Business Outlook Survey. The gap of 49 percentage points is close to 53 in the last survey, the biggest since the question was first asked in 1998.

Executives on balance said for the second quarter since mid-2007 that credit conditions had eased. Twenty-six per cent of executives said loans were easier to get, compared with 13 per cent who said they were harder. In the last report, the gap was four percentage points.

The survey indicated that terms have improved more for large companies, with some small firms still facing tighter lending terms.

Executives also predict slower inflation over the next two years, and on balance plan to buy equipment and hire workers.

On hiring intentions, 54 per cent of the 100 firms surveyed by the bank said they planned to add employees in the next year, as opposed to only 14 per cent that said they expected to reduce staff.

The balance of opinion on adding to payrolls in the next year was 40 percentage points, the highest since the first quarter of 2007. For investment in machinery and equipment, the balance of opinion was 17 percentage points, the highest since the third quarter of 2008.

In a news conference in St. Boniface, Man., Finance Minister Jim Flaherty said he was encouraged that both consumer and business confidence were improving but added that dangers remained.

"The economy is still recovering … (but) has not recovered," he said.

From the Star’s wire services

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The 2010 census couldn’t have come at a better time for the U.S. economy.

The government will hire about 1.2 million temporary workers in the first half of the year to administer the decennial population count, possibly providing a bridge to gains in private employment later in the year.

The surge will probably dwarf any hiring by private employers early in 2010 as companies delay adding staff until they are convinced the economic recovery will be sustained. Money earned by the clipboard-toting workers going door-to-door to verify the government population survey is likely to be spent, giving the economy an extra lift.

“It’s a short-term stimulus program in which the government’s injecting money into the economy through additional paychecks,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, who projects that 2.5 million more Americans will be working at the end of the year. “This will support consumer income during those months.”

Payrolls unexpectedly fell 85,000 last month, a Labor Department report showed today, and revisions showed they increased by 4,000 in November, the first gain in almost two years. Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 4,000 workers after adding 62,000 the previous month.

The economy will add 1.1 million jobs by the end of the year, according to the consensus estimate in a survey last month by Blue Chip Economic Indicators.

“We have the strongest increases in the second half of the year,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, referring to the firm’s forecast for hiring to grow by 800,000 this year.

Third Quarter

Economists’ payroll estimates for the year exclude the census numbers since the jobs created are temporary, with most disappearing by the end of the third quarter and the rest gone by December.

The stimulus bill President Barack Obama signed in February and additional funding by Congress provided enough money to hire 1.4 million Americans in total for the census, almost three times as many as in 2000 easy online payday loans. About 160,000 were already employed last year to do preliminary work.

The Census Bureau anticipates hiring about 181,000 workers from January through March and about 971,000 in the following three months.

First Five Months

The economy may add about 700,000 jobs in May alone, mostly because of the census, Gault said. Even Maki’s more optimistic assessment of the employment outlook means the U.S. may take years to recover the 7.2 million jobs lost since the recession began in December 2007.

“The bulk of these employees are from the low end of the income distribution; they are cash-constrained,” said Neal Soss, chief economist at Credit Suisse in New York who forecasts the economy will add a little more than 1 million jobs this year. “Having a paycheck is allowing them to spend in a way that they wouldn’t otherwise.”

Hiring for the census may also help lower the unemployment rate early this year, economists said, though the influence will be less than in payrolls. For example, some of the people hired may have other part-time jobs, limiting the impact on joblessness.

By the end of the year the jobless rate will fall to 9.7 percent, according to the median estimate of economists surveyed by Bloomberg News. The unemployment in December held at 10 percent.

Optimistic Outlook

Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, is among those optimistic about the outlook for jobs early in the year with or without the help from the census.

“We think it’s going to ramp up pretty quickly,” he said. Kasman forecasts the economy will create more than 2 million jobs this year.

Other economists anticipate a labor market weakness will persist through the next six months, even taking into account the census hiring.

“The labor market will effectively be stalled through the first half of 2010,” said James Shugg, a senior economist at Westpac Banking Corp. in London.

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Colorado research biotech Array BioPharma Inc. has reached a deal with industry giant Amgen Inc. that gives $60 million to Array and separately funds research jobs at the company.

The Boulder-based company licensed continued development of an experimental Type II diabetes drug, ARRY-403, to Amgen in exchange for the $60 million up front. Amgen also agreed to pay for an undisclosed number of research jobs at Array for two years.

Array BioPharm will complete the Phase I trial it started this year on ARRY-403, testing its safety and dosing in people for the first time. Under the licensing arrangement, Thousand Oaks, Calif.-based Amgen, will conduct future testing and development of the drug.

Under the terms of the deal, Array BioPharma retains the right to co-promote the drug in the United States, if ARRY-403 makes it to market. It will also make royalties on future sales of ARRY-403 that Amgen makes, the companies announced Monday evening.

With 390 employees, Array is second in size only to Amgen among Colorado’s commercial biotech drug employers, and the largest one based in the state. Amgen employs about 900 people in Boulder County.

Array researchers struck upon developing "glucokinase activator" compounds for treating diabetes in 2005 Same day payday loans. ARRY-403, the leading drug resulting from the research, is hoped to be a once-a-day pill that helps the body modulate glucose levels in the blood and increases the production of insulin, a process that doesn’t work properly in diabetics.

"Amgen is a leading innovator of important new therapies, with a focus on the treatment of severe, chronic diseases, and we believe that this collaboration indicates the significant potential of our glucokinase activator program," said Array CEO Robert Conway in a press release.

A trio of former Amgen scientists launched Array BioPharma in 1998 after Amgen closed some of its Boulder labs there. Array started with 25 employees and grew by researching potential drug compounds — primarily potential cancer treatments — for other biotechs.

ARRY-403 is among the first generation of treatments Array started developing for itself.

The Amgen deal helps Array end the year with positive news after it laid off 40 employees in January and scaled back its research focus.

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NEW YORK – A nine-month rally in oil prices could be faltering as a gradual sell-off that began in late October gains momentum.

Crude prices, which doubled from March to October, fell Friday for the eighth day in a row. The contract for January delivery gave up 67 cents to settle at US$69.87 a barrel on the New York Mercantile Exchange. It's the first time that oil settled below $70 a barrel since early October.

Prices hit two-month lows as the U.S. dollar gained strength and investors took a second look at paltry demand figures in the West.

All energy prices were in retreat despite a report Friday from the International Energy Agency saying global oil demand will rise next year more than previously expected. Analysts said they've heard such talk before, and they're now looking for concrete signs of demand from both consumers and industry.

"How do you know when the economic recovery really begins? It is when real oil demand growth appears," analyst Phil Flynn said in a report. "Not just artificial demand growth being propped up with smoke and mirrors, but demand growth that comes with solid economic activity and global growth."

The IEA, an energy watchdog for some of the biggest crude consuming countries, said Friday that it was raising its estimates for 2010 global oil demand because of increased economic activity in Asia and the Middle East.

The Paris-based organization said in its monthly report that crude demand would reach 86.3 million barrels a day in 2010, up 1.7 per cent from 2009. Last month, the IEA forecast oil demand of 86.2 million barrels a day in 2010.

Meanwhile, the U.S. dollar has surged on a drop in U no fax cash advance.S. unemployment and an anticipation that the Federal Reserve may raise interest rates.

Oil contracts, which are priced in U.S. currency, tend to move in the opposite direction of the U.S. dollar.

Crude had jumped as high as $82 a barrel in October. Since then, oil prices have slumped 13 per cent. U.S. consumption of petroleum products including heating oil and diesel, has fallen about 20 per cent from a year earlier, Barclays Capital said in a report.

"It is really the lack of inspiration in distillate demand that stands out, showcasing the lack of cold weather and no turnaround yet in trucking activity in the U.S.," Barclays said.

Retail gasoline prices are also nearing two-month lows.

Pump prices fell by less than a penny overnight to a new national average of $2.623, according to auto club AAA, Wright Express and Oil Price Information Service. A gallon of regular unleaded is 3.1 cents cheaper than a month ago and 95.9 cents more expensive than last year.

In Canada, the price at the pump averaged 98.5 cents Canadian per litre, down from $1.025 per litre a month ago, according to price-watching website GasBuddy.com.

In other Nymex trading in January contracts, heating oil added less than a penny to settle at $1.9085 a gallon while gasoline added less than a penny to settle at $1.8416 a gallon. Natural gas fell 13.5 cents to settle at $5.163 per 1,000 cubic feet.

In London, Brent crude for January delivery added two cents to settle at $71.88 on the ICE Futures exchange.

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Mid-cap stocks have been anything but middling in 2009.

They’ve been the sweet spot for investors still leery of the large-cap stocks that burned them in the recent past. Too many big-name companies also seem to be offering only downsizing as a strategy these days.

With large caps and small caps garnering all the attention, mid caps usually fall between the cracks.

Yet mid-cap growth funds are up 34 percent and mid-cap value funds up 31 percent this year, according to Lipper Inc. Both have surpassed the 26 percent increase of the average diversified stock fund.

"Mid-cap stocks are a neglected part of the market, a well-kept secret not a lot of investors know about," said Patrick Dunkerley, portfolio manager for Scout Mid Cap Fund, which is up 40 percent this year. "It’s no surprise they’re outperforming this year, since half the time coming out of an economic downturn mid caps outperform and half the time small caps outperform."

Mid-cap (which stands for middle capitalization) stocks are loosely defined as those of companies with capitalizations between $2 billion and $10 billion. It is a squishy term whose parameters can vary considerably from investment firm to investment firm. It basically encompasses companies that aren’t either big or small, and that concept is in the eye of the beholder.

"Mid-cap companies can still be nimble like their small-cap counterparts and aren’t as bloated as the larger companies," said Scott Grittinger, principal in McCarthy Grittinger Weil Financial Group LLC in Milwaukee. "They have the ability to grow but aren’t considered risky start-ups anymore."

With money now heading to more aggressive investments such as junk bonds; emerging market stocks and bonds; and smaller stocks, noted Grittinger, mid-cap stocks offer a modestly aggressive possibility. A mid-cap company typically has a better management team, more financial liquidity and greater opportunity to raise capital through loans and initial public offerings than the small-cap counterparts.

"Mid-cap companies have had good strong earnings, and many have beaten the estimates," observed Tom Roseen, senior research analyst with Lipper Inc. in Denver. "Investors are reaching for larger capitalizations but don’t seem interested in reaching for the biggest of the big."

Mid-cap portfolio managers sometimes have a blend of mid-cap and small-cap stocks but won’t venture into large-cap territory, Roseen said. Only if a portfolio manager has a strong buy-and-hold philosophy will a mid cap that has grown into a large cap be kept.

Here are some mid-cap stocks priced right and worthy of investment, according to Scout Mid Cap’s Dunkerley:

— Cimarex Energy Co., a producer of natural gas and oil whose stock is inexpensive, has a long runway ahead of it as it drills its properties, expands production and increases earnings.

— Priceline.com Inc., a global phenomenon with about 70 percent of its profits coming from Europe, has been increasing revenue at a 30 percent annual clip while taking market share from online sites and travel agents.

— Terex Corp., a maker of road pavers, construction machinery and mining equipment, is a cheap stock that will benefit whenever the world’s economy perks up and infrastructure needs are being met.

— Allegheny Technologies Inc., a fabricator of high-strength metals used in the oil and gas industries, deepwater drilling and jet planes, is out of favor now but well-positioned for the long haul.

Scout Mid Cap Fund has 66 stock holdings with average market capitalization of $6.2 billion. This "no-load" (no sales charge) fund requires a $1,000 minimum initial investment and has an annual expense ratio of 1.4 percent.

"We do rigorous fundamental research on companies, and we like a strong liquidity position, strong cash flow, strong balance sheet, good valuation and a strong catalyst to drive growth," said Dunkerley. "We really don’t like ‘gotchas’ like bad management or litigation."

Roseen sees a number of mid caps positioned to do well. In technology, he points out Salesforce.com Inc. and Adobe Systems Inc.. Among retailers, he notes Urban Outfitters Inc., Tiffany & Co. and Abercrombie & Fitch.

Turning to mid-cap funds, Grittinger especially likes T. Rowe Price Mid Cap Growth Fund, up 39 percent this year, because of proven portfolio manager Brian Berghuis who has been with it since 1992. The fund was closed to new investors in 2003 because of rapid asset growth but reopened in 2008 after the market drop had reduced its size.

"Unlike many mid-cap growth mangers, Berghuis does pay attention to valuations, and that appeals to us," said Grittinger, also noting that solid balance sheets and diversity of industries are hallmarks of that fund’s holdings. "Growth at any price is a loser’s game."

The largest holdings in its 141-stock portfolio include Agnico-Eagle Mines, Global Payments Inc., Marriott International Inc., The Western Union Co., Expedia Inc. and Juniper Networks Inc.. T. Rowe Price Mid Cap Growth is a no-load fund with a $2,500 minimum initial investment and an annual expense ratio of 0.82 percent.

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China’s government-funded economic growth faces an “inevitable” slump because the nation’s export-led strategy isn’t sustainable, said Yu Yongding, a former adviser to the Chinese central bank.

“The investment rate cannot increase forever,” Yu, a member of the Chinese Academy of Social Sciences, said in a speech in Melbourne last night. “The growth rate of China’s exports cannot remain persistently higher than that of the global economy. Overcapacity will surface and correction is inevitable.”

China’s economy grew 8.9 percent in the third quarter, the fastest expansion in a year, spurred by an unprecedented $1.3 trillion of loans this year and a $586 billion stimulus package running through 2010. China’s leaders may highlight inflation concerns at a meeting this month to set economic priorities for 2010 without changing existing fiscal and monetary policies, economists said yesterday.

“Expansionary fiscal and monetary policies have succeeded in arresting a fall in growth,” Yu said. “However, the medium and long-term impacts of the expansionary policies are worrying.”

Those effects include overcapacity, a decline in investment efficiency that will weigh on long-term growth, poor infrastructure efficiency, an increase in non-performing loans, and loose monetary policy, he said.

“There is no need for China to drop the benchmark interest rate to such a low level,” he said. “If commercial banks had been allowed to make decisions based purely on economic considerations, growth of credit and money supply would not have been so fast. There would have been less need to worry about the possibility of a rising non-performing loan ratio, a worsening economic structure and resurgent asset bubbles.”

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