World economy out of free fall

The world grouping OECD said on Friday the global economy was out of free fall, offering hope of recovery late this year, but investors focused on risks to the U.S. credit rating from rising government debt.

Japan's central bank governor said new data now banished notions of the world's second-biggest economy falling off a cliff and Canada's finance minister saw glimmers of hope.

The U.S. dollar dropped to a 2009 low as fears grew the United States could be at risk of losing its precious triple-A rating, which would have wide implications for global investment already throttled by the crisis.

Standard & Poor's stirred concern on Thursday by suggesting Britain could face a downgrade to its triple-A rating. The ratings agency cut its outlook for Britain to negative as debt nears 100 percent of gross domestic product.

Is this a warning shot or is it the start of a trend? This is very dangerous territory, said Axel Merk, president and chief investment officer at Merk Mutual Funds.

Britain suffered more bad news on Friday, when an official report showed its economy shrank 1.9 percent in the first three months of the year, the sharpest quarterly fall since 1979.

Wall Street stocks <.N> finished slightly lower, the fourth session of losses, on worries about the U.S. budget deficit.

The White House said it did not believe the U.S. credit rating would be cut. Ratings agency Moody's Investor Service said on Thursday it was comfortable with the U.S. triple-A rating but it is not guaranteed forever.

The United States, where last year's housing market collapse set off the crisis now hitting trade and industry worldwide, has been running up government debt as it uses billions of dollars to bolster the financial system and stimulate the world's largest economy.

Ben Bernanke, chairman of the U.S. Federal Reserve, offered some signs of optimism, telling graduates of a law school that the economy will recover -- it has too many fundamental strengths to be kept down for long.

CHALLENGING TIMES

The head of the Organisation for Economic Cooperation and Development (OECD), Angel Gurria, said ratings agencies must recover their prestige and credibility after being widely criticized for failing to predict the crisis.

It seems absolutely inexplicable that they want to cut the rating of England and that there is talk they are going to cut the rating of the United States, he said.

Gurria acknowledged there was a risk the crisis could be prolonged without fiscal and credit discipline but that world output could begin to recover by the end of this year.

We're no longer in a free fall, he said.

But HSBC Holdings , Europe's biggest bank, signaled persistent problems in the financial industry, saying the rest of 2009 and probably much of 2010 will be challenging. HSBC has weathered the crisis better than most banks thanks to a strong balance sheet and a high level of deposits in Asia.

In the United States, there was more bank shakiness as regulators seized troubled Florida lender BankUnited FSB on Thursday and sold it to private equity firms. The failure was the largest by a U.S. bank this year but there was no sign of panic among customers.

The crisis continued to hit other businesses, with British Airways , Europe's third-biggest airline, slumping to record losses, canceling its dividend and nearly doubling its debt.

In the struggling auto sector, General Motors won a cost-cutting deal from its Canadian union, part of a package of concessions it is expected to take into a U.S. bankruptcy court by the end of May in a showdown with its bondholders.

The bondholders, which hold about $27 billion of GM's debt, have balked at the terms they have been offered.

CANADA'S HOPE, RUSSIA'S WOES

In one sign the global tailspin may be slowing, Canada -- the largest U.S. trading partner -- said retail sales rose for the third straight month in March.

There are some glimmers of hope. There are some encouraging signs in the Canadian economy, Finance Minister Jim Flaherty said. But this is a difficult year, particularly with respect to unemployment.

The International Monetary Fund said Canada's strong policy framework and proactive response put it in a better position to deal with the crisis than most countries but that it still faces economic difficulties in the near term.

Russia, hit by lower oil prices as the global slowdown cuts demand for its commodities, saw unemployment rise to a 9-year high in April and retail sales slump for the third month in a row.

The latest data added credibility to an Economy Ministry forecast that Russia's recession could last up to two years.

Despite Russia's woes, Eastern Europe could benefit from any economic recovery early because of its strong industrial infrastructure and low costs, European Central Bank Governing Council member Ewald Nowotny said in an interview to be published on Saturday.

Japan also signaled cautious optimism, with the central bank upgrading its view of the ailing economy for the first time in almost three years. The Bank of Japan also kept interest rates on hold, saying steep falls in exports and output were leveling out.

There have been expressions like freefalling or falling off a cliff, said Bank of Japan Governor Masaaki Shirakawa. We are no longer in that sort of situation.

(Reporting by Reuters correspondents worldwide; Editing by John O'Callaghan)