The global economy is coming back to life, but plummeting equity markets and a deepening crisis of confidence in the integrity of U.S. corporate earnings are sapping investors’ faith in the recovery, say TD economists in the latest issue of the TD Global Quarterly Economic Forecast.

After dipping to just 2.3% in 2001, world output is poised to rise by 2.7% this year, and expand further, by an above-average, 3.7% in 2003. “Yet, with much of the impetus still coming from exports, the durability of the revival is being questioned, as fresh reports of accounting misdeeds in the United States stoke fears of a renewed downturn in the world’s biggest export market,” noted Gillian Manning, international economist at TD Bank Financial Group.

In Japan, optimism earlier in the year about an export-led recovery is beginning to look like another triumph of hope over experience. The yen’s 15% rise versus the U.S. dollar since February is an obvious source of concern. Japanese firms are cutting back capital spending. “The current rebound will be short-lived,” cautioned Manning. “We believe Japan’s economy will shrink this year, and expand by just 0.5% in 2003.”

Elsewhere in Asia, conditions are much brighter. “Fresh from its admission to the World Trade Organization, China is set to top the regional growth tables again this year, as surging exports boost industrial production – up by 12% per month on a year-over-year basis, on average, in the January-June period,” Manning commented. “South Korea isn’t far behind,” she added.

The euro-zone economy is on the mend, but the recovery remains spotty — and, as in so many other parts of the world, highly dependent on exports. “Higher-than-expected inflation and deteriorating labour market conditions have taken a chunk out of consumer spending across the region” Manning said. “We do not expect the European Central Bank to raise rates before year-end, at the earliest.”

Latin America remains weak. “Overall, we expect South America to stagnate this year, with next year’s modest rebound vulnerable to downside risks, should financial market contagion persist,” said Manning.