Financial policymakers won round one. Their $5 trillion, shock-and-awe campaign of tax cuts, spending programmes and super-cheap official money wrested the global economy from the jaws of a deep and damaging depression. Now the real test begins: withdrawing this vast monetary and fiscal support without letting their economies slide back into recession.

The outlines for the withdrawal strategy started to take shape this week from leading central banks. Many analysts this summer were looking for a LUV-shaped global recovery. That’s LUV as in a long, slow and L-shaped recovery in Europe (steep drop, flat-lining); a U-shaped rebound in the US (the same but with an earlier recovery) and a V in Asia — a steep downdraft, then off to the races again.

But in recent weeks the global recovery has started to feel more V-shaped. China is powering ahead and set to deliver 8 per cent growth this year. The US posted a robust 3.5 per cent upswing in the third quarter. Australia, Norway and Israel are sufficiently confident that they have started to raise interest rates again. Manufacturing and services indices for October turned upward around the world.

But the underlying fact remains that this economic recovery — whatever its shape — is a drug-induced one, kept alive by an unprecedented injection of money into bank coffers and citizens’ pockets. Only when these extraordinary measures are withdrawn will it become clear whether economies truly have regained their resilience.

Central bankers this week tiptoed into those waters. The US Federal Reserve said on Wednesday that it would trim the amount of mortgage agency debt that it buys to $175 billion from $200 billion, a minor adjustment in a $3 trillion market and one it described as technical in nature. Nevertheless, it marks a second baby step towards weaning the US housing market, the heart of the credit crisis, off life support.

Yesterday the European Central Bank joined in. Its President, Jean-Claude Trichet, said that markets did not expect the ECB in December to renew its special programme of lending unlimited funds to banks for one year at very low rates. Decoding central bank speak, that means it is getting ready to withdraw support.

Only the Bank of England cranked up the machine. But even its announcement yesterday of a £25 billion expansion of asset purchases from banks, to £200 billion was half the increase expected. Little surprise it decided on continued support when UK output has fallen by 6 per cent since the start of 2008 and the country remains in the grip of its worst recession in at least 50 years.

But LUVers needn’t worry. Real, sustainable demand is shaky. In the US factory inventories grew in October but new orders, exports and delivery times all fell. GDP numbers also were driven by government incentives. The consumer cannot pick up the slack when personal debt remains high, unemployment is rising and home foreclosures continue at the rate of one every 13 seconds.

Little wonder that stock markets have slipped and the VIX index, or fear gauge, is rising. The second phase of the rebuilding has only just begun. LUV hurts.

Stella Dawson is treasury editor of Reuters

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