By Mike Dolan

LONDON (Reuters) - Crystal ball gazers are having a tough time of it predicting where the roaring world economy is headed as the second half of 2004 gets underway.

Few disagree it has built up enough momentum to see it through the rest of the year and growth rates for 2004 as a whole are now set to be the fastest in 16 years.

But the next six months already look like a bumpier ride for households, businesses and investors than the first half.

Judging from a host of early indicators from June, the peak of the year-long growth surge may have passed but inflation is lurking as more jobs are created, wages pressures build and spare capacity in factories and offices gets used up.

As a result, the massive monetary and fiscal stimuli that sparked the boom are being withdrawn - pushing borrowing costs up again as the effects of tax cuts and government spending ebb.

A widespread concern is the households who propped up western economies during the worst of the downturn -- by spending freely on the back of cheap borrowing -- may be hypersensitive to even the slightest rise in interest rates.

Will attempts to nip prices in the bud eventually trip everyone up and see the world economy fall hard in 2005?

For all the obvious risks, most remain pretty optimistic.

"We're looking for very robust global GDP growth during 2004 and 2005," said Larry Kantor, Head of Economics at Barclays Capital, adding he expected an average 4.5 percent rate over both years - the fastest biennial growth rate in 20 years.

"Higher interest rates are more than offset by accelerating income and we are confident that China, while slower than its recent torrid pace, will remain strong at least 7 percent."

Think-tank the Economist Intelligence Unit forecasts world growth as high as 4.9 percent this year and 4.3 percent in 2005.

Experts say that while it would be churlish to dismiss the risks, the sheer pace of this growth is impressive and the fact the global economy is seeing a synchronized upturn from region to region for the first time in decades is highly significant. Barclays reckons the U.S. Federal Reserve will have to be aggressive in controlling inflation and sees Fed interest rates 3.25 percentage points higher by next August.
Others agree the central bank may have to be tough.

"We may be seeing a moderate slowdown here but the underlying momentum is very strong," said Mark Cliffe, Chief Economist at ING Financial. "There's even a risk that June was just a mini-interruption caused by a temporary oil price spike."

WHAT THE CRYSTAL BALL SAYS

At these points, leading indicators of activity and demand -- either those gleaned from the real economy or from the markets that reflect and bet on it -- should prove their worth.

But an array of indicators most frequently used to gauge future economic activity are broadcasting conflicting signals.

"From an investment point of view, we're in an environment of great uncertainty," said Avinash Persaud, investment director at fund managers GAM.

"There are so many potentially overlapping events on the horizon that it's hard to be confident of a long-term trend."

One of the clearest indications of the recent global cooling comes from June business surveys.

A global index for JPMorgan derived from monthly polls of manufacturing and services firms slipped to 58.7 in June from 60.7 in May. While it remains well above the boom-bust 50 level, it was the second consecutive monthly decline and the lowest level this year.

Goldman Sachs' proprietary Global Leading Indicator - which uses a different sample of surveys and data - also showed its second decline in June. Goldman said this suggests industrial production in the Organization for Economic Cooperation and Development area may peak in the next few months, if not before.

A glance at equity markets this month would support the view of cooling growth. Driven by less-rosy earnings forecasts and a feeling the big productivity gains of the current cycle may be passed, the MSCI World Free Index of global stock markets is down about two percent this month.

But the bigger picture shows investor indecision. While the broad equity index is still more than four percent below February peaks, it is more than five percent up from the year's low set in May.
And, for all stock market jitters may be justified by surveys and valuations, they appear to conflict with a story of renewed strength in activity from commodity and shipping prices.

Industrial metals prices, which tend to capture advance pulses in manufacturing demand, have surged in recent weeks and are up more than 14 percent from May's low.

And after more than halving from February's high, the Baltic Dry Freight Index - the cost of chartering ships to carry dry loose freight - has surged 35 percent in two weeks.

The divergence of survey and equity signals from commodities and shipping is difficult to square.

Economists say it's possible the commodities markets are distorted by speculative activity. Some say the oil price spike and retreat caused a lot of noisy signals and others say there are differing views of the impact of monetary policy moves.

But the absence of China, on some measures the second biggest economy in the world, from the major business surveys and its impact on demand commodities may explain something.

Economists see government measures to control an investment boom there taking their toll, but the slowdown so far this year is expected to have been slight.

Second-quarter Chinese gross domestic product data are due out in mid-July and, excluding effects related to last year's SARS epidemic, are expected to show a dip in underlying annual growth to 9.5 percent from 9.8 percent in the first quarter.

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