Improving vital signs across the globe -- from US GDP to Japanese factory output and British house prices to German retail sales -- raised hope on Friday that the world economy was responding after months in intensive care.

The US economy shrank 5.7 per cent from the first quarter of 2008, less than the previous estimate of 6.1 per cent and slightly worse than market expectations for a 5.5 per cent fall.

The report confirmed that economic activity declined for three straight quarters for the first time since 1974-1975, but US stocks rose in part on data showing corporate profits after taxes increased 1.1 per cent -- the first increase in a year and a turnaround from a 10.7 per cent drop in Q4.

The potential General Motors Corp bankruptcy also hovered over the world financial picture as GM shareholders and bondholders braced for a Chapter 11 bankruptcy expected by Monday's restructuring deadline.

'It's clear to me, based on the market action, that we've turned a corner in this economy,' said Sasha Kostadinov, portfolio manager at Shaker Investments. 'The question that I have is, when we get a clear view of what's around the corner, is it going to be better growth and moderate inflation, or is it going to be slow growth and bad inflation?'

While US stocks marked their third straight monthly advance, the dollar fell to five-month lows against a basket of currencies as an advance in global equities and signs of an easing global recession drove investors to snap up higher- yielding currencies and riskier assets.

Gold, metals and soft commodities also rose on the weak dollar. Oil rose to a six-month high above $66 per barrel.

Auto industry in turmoil

The United Auto Workers union ratified a new cost-cutting labor agreement with GM to clearing a major hurdle in the automaker's restructuring.

With US and foreign automakers, suppliers, workers and retirees all holding a stake in the outcome, GM and Canadian auto parts group Magna International Inc also reached an agreement in principle that could rescue GM unit Opel.

The GM saga is also a test for US President Barack Obama, hoping for a quick resolution of the process in which the US Treasury would temporarily hold a majority stake in the venerable US automaker.

Obama got a boost when advisers to GM bondholders representing $27 billion in the automaker's debt urged investors to support a debt swap negotiated with the White House over the past week.

Bondholders have until Saturday to register their support for the terms of a deal that would give them up to 25 per cent of a reorganized GM. That offer is contingent on the US Treasury determining that enough investors have signed on in support.

Japanese demand    

In Asia and Europe, data pointed to signs of recovery.

Japanese factory output rose 5.2 per cent in April, the biggest jump in more than half a century, and manufacturers forecast further gains, while South Korean industrial output expanded for a fourth straight month.

German retail sales showed a 0.5 per cent month-on-month rise in April, while private consumption for the first quarter rose a similar amount, despite a 3.8 per cent contraction in GDP.

In Britain, house prices registered a surprise rise in May -- the second time in three months -- but economists were cautious.

'Any recovery is likely to be gradual and protracted,' said Colin Ellis, economist at Daiwa Securities.

Indian GDP beat forecasts with growth of 5.8 per cent year- on-year in the March quarter, with strength in services and construction outstripping a decline in manufacturing.

'I think the GDP upgrade cycle has just started,' said Rajeev Malik, economist at Macquarie Capital. – Reuters