By Richard Hubbard and Andrew Marshall
LONDON/SINGAPORE (Reuters) - The pace of economic decline in western Europe is slowing, data showed on Thursday, though activity remains subdued and prospects for global recovery have been darkened by governments' future borrowing plans.
A sharp rise in U.S. government bond yields highlighted the scale of investor fears and other government debt markets followed suit, dragging down equity markets that had been boosted by better economic data.
As General Motors Corp
The business climate index rose in May for the second month running, albeit from a very low point and indicating that levels of industrial production remain subdued.
The Business Climate Indicator (BCI) rose to -3.17 points from an upwardly revised -3.26 in April, its first improvement over two straight months since May 2008, the European Commission said in a statement.
"The indicator nevertheless remained at a very low level, suggesting that year-on-year industrial production growth will have been negative in April and will remain distinctly subdued in May," the Commission said.
The Conference Board research group's Leading Economic Index for the euro zone rose 1.8 percent to 93.8 points in April, suggesting the single currency area's economy may be bottoming out.
German unemployment rose by a smaller-than-expected 1,000 month-on-month in May, adjusted for seasonal swings, Federal Labour Office data showed.
The headline unadjusted figure declined by 127,000 to 3.458 million, the Office said, but it noted that statistical changes had helped to improve the May jobless figures.
RECOVERY OUTLOOK CLOUDED
The picture of a slow recovery painted by the data is being overshadowed by a growing mountain of debt as governments battle to keep their economies afloat.
In its annual budget on Thursday, New Zealand's government announced the biggest deficit in 25 years and forecast 10 years of government deficits, with debt peaking at around 40 percent of GDP in 2016/17.
The outcome mirrors that already announced by other major western nations, the most significant being the U.S. government.
U.S. government bonds came under heavy pressure again on Wednesday as investors focused on the ever-expanding amount of money needed to fund a record $1.75 trillion budget deficit.
The downdraft in bonds was so heavy it dragged down the whole U.S. stock market, inverting the more normal relationship where U.S. Treasuries tend to track equities.
The decline was largely concentrated in longer-dated maturities, which drive interest rates for all borrowers.
"You're exploding the issuance at a time when demand for the product you've got is at best flat," said Malcolm Polley, president and chief investment officer at Stewart Capital Advisors. "So rates are going to go up. It's simple economics."
Benchmark 10-year notes saw their yield rise nearly 20 basis points to 3.74 percent in just one day. It has risen over 1.25 percentage points in just six weeks.
Following the rout in the U.S., Asian stocks fell in turn on Thursday and European bourses were weaker.
In Britain, outgoing central bank monetary policy committee member David Blanchflower said the world should not assume the worst of the economic crisis is necessarily over.
"My worry is that there can be many false dawns and we shouldn't just assume that everything is over," the usually dovish economist told The Times newspaper.
"We have to have a rethink. You're going to have to throw away lots of economics and start again. How can anybody not say that when we've had the greatest financial crisis in 100 years."
GM BANKRUPTCY EYED
Global markets are also watching developments in the U.S. auto industry, where GM moved closer to filing for bankruptcy protection after a crucial bond exchange proposal failed.
In Germany, talks on shielding GM's European brand Opel from the looming bankruptcy of its parent ended without a resolution although a list of potential bidders has narrowed to two.
German ministers, emerging in the early hours of Thursday morning after more than 12 hours of talks, said they had been unable to reach a deal to provide Opel with temporary financing if GM files for bankruptcy, and put the blame for the failure squarely on GM and the U.S. Treasury.
German Finance Minister Peer Steinbrueck said he hoped a deal could be reached on Friday, but said there was "surprise and disappointment" with the stance of U.S. negotiators.
Chrysler also faces a key court hearing on Thursday expected to clear the way for Fiat SpA, along with labor unions and the U.S. and Canadian governments, to take control of a restructured company in exchange for $2 billion paid to lenders.
(Reporting by Reuters bureaux worldwide; Writing by Richard Hubbard and Andrew Marshall; Editing by Jerry Norton and John Stonestreet)
