Think of the stock-market rally that followed Europe's plan to contain its debt crisis as the deep breath you take while climbing a hill: The relief from the strain of the ascent feels good, but it's still a long way to the top.
Equity prices around the world surged Thursday in response to a pledge by European leaders to cut Greece's debt, to expand the firepower of its rescue fund to more than €1-trillion and to force banks to bolster their reserves.
Investor sentiment was further bolstered by a government report in Washington that showed the U.S. economy expanded at an annual rate of 2.5 per cent in the third quarter, a significant gain from the first half, when the world's largest economy barely grew at all.
The U.S. Commerce Department's first of three estimates on gross domestic product swept away talk that the country was on the precipice of its second recession in two years. Personal consumption grew at the fastest pace in a year and business investment jumped 16.3 per cent from the previous quarter.
"Clearly, the U.S. isn't in recession," said Krishen Rangasamy, an economist at National Bank Financial in Montreal.
All of this is to the good. But some perspective is important. The world economy remains dangerously weak as governments and households in the world's advanced economies curb spending to pay off debt. The lack of demand is taking a toll on confidence, as is the inability of politicians to come up with coherent economic strategies.
The Bank of Japan cut its growth forecast for 2012 to 2.2 per cent from an earlier estimate of 2.9 per cent, a dramatic improvement from the 0.3 per cent expected this year, but not especially strong, given the government will spend more than ¥12-trillion rebuilding from the March tsunami that left 19,000 people dead or missing.
Sweden's central bank, which oversees the strongest economy in Europe, on Thursday pushed plans to raise interest rates into next year because prospects for exports – especially to its European neighbours – are so bleak.
For the United States, economic growth of 2.5 per cent is like treading water, which is fine when the unemployment rate is around 6 per cent, but not when the jobless rate is 9.1 per cent, as it is now.
Most analysts say the U.S. needs growth closer to 4 per cent to stay ahead of natural increases in the labour market and significantly reduce unemployment. No one anticipates that happening, and some analysts say they expect the U.S. economy will slow over the final three months of the year. That is because of the turmoil caused by Europe's struggles to come up with a program to backstop debt-strained countries such as Greece and Italy, and the banks that have invested heavily in those nations' debt.
"Companies aren't investing because there is a low level of demand," James Owens, the former chief executive of Caterpillar Inc., said at The Economist magazine's annual Buttonwood Gathering in New York on Thursday.
On a day when stocks surged across the globe, the conference proved a venue for sober second thought, as an array of investors, policy makers and economists cautioned against the notion that the problems with the global economy can be fixed quickly or easily. Bank of Canada Governor Mark Carney believes Europe is poised for a recession as governments implement austerity measures.
"We are very close to a zero-growth situation in the U.S. and Europe," said Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, the world's largest macro hedge-fund firm with more than $120-billion (U.S.) in total assets.
The European debt plan is more aspirational than it is concrete. Most details must still be worked out, including who might be willing to put up money for a special investment vehicle that the Europeans want to create to expand their financial arsenal.
There have been false dawns before in Europe's debt crisis, most recently in July. These moments follow a similar pattern: Leaders meet into the wee hours, devising a plan that sparks an immediate rally in stock markets, only to fade as investors start to doubt the political resolve of the euro zone's 17 governments to follow through.
"We're in a hope rally now," said Steven Tananbaum, managing partner and chief investment officer at New York-based GoldenTree Asset Management, which controls assets valued at $13.5-trillion. "The last hope rally we had was July. It lasted two days."