World markets ended a tumultuous week Friday with a day of solid gains, as European countries pushed to contain their economic problems and U.S. consumers, who have remained largely on the sidelines of the anemic recovery, spent more than analysts had expected.
In the United States, the Dow Jones industrial average was up 1.1 percent, to 11,269.02. After a series of breathtaking losses and gains over the previous four days, the Dow finished the week only 1.5 percent lower than where it had started.
Major European markets were up more than 3 percent Friday after officials banned short selling, a practice in which traders make money on a stock’s decline. Some regulators suspect that the practice encourages excessive speculation and contributed to a sharp drop in the value of European bank stocks this week.
But other news from Europe gave a truer picture of the problems that remain. New data on economic growth showed that the French economy, Europe’s second-largest, has ground to a virtual halt, and a report on industrial production showed it slowing across the continent.
The Italian government, facing pressure from global investors and other European countries to control its public debt, approved $65 billion Friday in new budget cuts and tax increases aimed at balancing its budget by 2013. The cuts will raise taxes on high-earners while reducing spending on transportation and other projects that some economists say are needed to improve growth.
But Premier Silvio Berlusconi said there was little choice. The European Central Bank has been urging Italy to take dramatic steps to control the national debt. Last weekend, the ECB came to Italy’s aid, announcing that the central bank would begin buying Italian government bonds in an effort to counteract a precipitous rise in the country’s borrowing costs.
“We’re personally pained to have taken these measures, but we are satisfied,” Berlusconi said after a negotiating session with opposition groups and local officials, according to wire service reports from Rome.
The strong showing in U.S. markets came after a Commerce Department report of a jump in consumer spending in July, as Americans increased their purchases of electronic products, furniture, autos and other goods. Consumer spending rose 0.5 percentage points in July compared with the month before. The report was the latest in a series of mixed economic indicators, which show that the U.S. economy is continuing to grow, but at a slowing pace.
The retail sales increase is “hardly spectacular,” particularly because it was driven in part by higher gasoline prices, Paul Dales, senior U.S. economist for the Capital Economics consulting firm, wrote in a research note.
But amid concerns that the United States could be headed for a double-dip recession, any sign of economic activity is a good one.
Combined with a better-than-expected report earlier in the week on unemployment benefits, analysts at ING Financial said the retail report makes “a cautious case for modest optimism” about the U.S. economy’s ability to avoid a renewed recession and continue growing for the rest of the year.
The same can’t be said for Europe, where authorities continue to struggle with slow economic growth and a nagging set of financial problems.
The ban on short selling adopted Thursday by Belgium, France, Italy and Spain provided an immediate boost to equity markets, where concerns about the health of European financial institutions had led to a sharp sell-off of bank stocks.
In a short sale, an investor borrows a stock and then sells it, betting that its price will fall and he’ll be able to buy it back later for less, pocketing the difference when he returns it.
A statement from the European Securities and Markets Authority said the ban was adopted to “restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field.” Speculation earlier in the week that France’s AAA credit rating would be downgraded led investors to abandon financial firms whose holdings of French government debt would be at risk if the country ran into economic trouble.
But the regulatory action will do little to quell underlying concerns about Europe’s economy.
According to data released Friday, France’s economy did not grow at all over the past three months, raising concerns about one of the potential engines for a European recovery. The disappointing result, analysts said, means the country may fall short of the 2 percent economic growth that French officials have forecast for the year. That could put France at risk of missing its budget and deficit targets.
The impact could be felt beyond France, whose financial health remains crucial for European efforts to shore up other struggling countries in the euro zone, including Greece, Ireland and Portugal.A new European initiative depends on major nations such as Germany and France retaining their good credit standing. If France were to falter, so would its ability to support the various bailout efforts and other emergency programs that European officials have approved.
French President Nicolas Sarkozy and German Chancellor Angela Merkel are scheduled to meet next week to discuss their next steps in addressing the region’s fiscal and economic crisis.