The risks of stagnant US consumer spending, a eurozone collapse and rising inflation in Asia are the three main dilemmas facing the global economy according to Barclays Wealth’s forecast for the third quarter of this year.

In its economic outlook, Signpost, the firm’s experts said that the first quarter of US gross domestic product growth rate of 2.7 per cent was much lower than their initial estimates.

The real household disposable income is close to the level it was at the trough of this recession and consumers are reluctant to spend. “The outlook here is worrying: the recovery could easily stall or peter out in 2011,” said Michael Dicks, chief economist at Barclays Wealth.

The good news, according to Barclays Wealth, is that the decline in US housing prices has ceased;  however, prices are expected to remain static, making the occasional jump or fall along their peak. Only a gradual pick up can be expected in Barclays Wealth’s most likely scenario, as estimates into 2011 show the US having difficulty avoiding further fiscal tightening given its target of halving the deficit by 2013.

Looking at the eurogroup, Dicks said: “Since Greece cannot devalue – unless it leaves the EMU and creates a new drachma – Greek firms won’t see any great improvement in competitiveness, following their adoption of a joint EU-IMF adjustment programme.”

With the euro’s interest rates set centrally in addition to Germany now choosing to accelerate plans to fix its own budget deficit, Barclays Wealth forecasts a growth rate of around 1 per cent for 2010 and the following year across the eurozone.

The last issue in the firm’s third quarter outlook is that of rising inflation in Asia. Some of the Asian economies that were least affected by the global crisis are growing above their sustainable pace, specifically, China.

In recent years, the Chinese economy has been growing very strongly with no spare capacity, causing inflation to rise. One possible scenario to halt inflation would be the Chinese letting their currency rise which should slow down export growth and increase consumer spending.

In Japan, fiscal problems are expected to cause its economic recovery to slow down in the second half of the year. However, even with inflation rising, the Chinese and the other regional economies appear unlikely to slow their pace.

As for the global equity market, equities performed poorly in the second quarter due to fears of a eurozone collapse and the global economic turmoil.

According to Barclays Wealth's GDP-based valuation approach, equities are expected to remain cheap and gain in the coming quarters if fiscal fears weaken.  However, how equities will turn out is highly uncertain as growth in the US and Asian markets look to slow in the second half of the year, the report said.