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G7 pessimistic about global economy PDF Print E-mail
Monday, 11 February 2008

Reuters . Tokyo

Finance leaders of the worlds top industrialised nations put on a show of solidarity on Saturday in the face of an economic slowdown and conceded that things could get even worse because of the crumbling US housing market. In a communique released after meetings in Tokyo, the Group of Seven said prospects for economic growth had worsened since they last met in October, although fundamentals remained solid and the US economy was likely to escape a recession. There was a climate of much greater pessimism and worry than in October, said Italian economy minister Tommaso Padoa-Schioppa.

Finance ministers and central bankers from Japan, the United States, Canada, Britain, Germany, Italy and France said that growth in their countries was expected to slow by varying degrees in the short term. They pointed to serious risks from the US property market slump and subsequent tightening of credit conditions, which has slowed the flow of money to the consumers and companies that drive the world s economy.

Debt-laden banks have curbed lending as their losses, tied primarily to souring US home loans, rise above $100 billion. That has raised the specter of a vicious cycle as consumer spending slows, prompting businesses to retrench and cut jobs. Glenn Maguire, Asia Pacific chief economist with Societe Generale in Hong Kong, noted that the G7 offered little in the way of detail on coordination action to support the economy.

This economic shock and the economic downturn is largely driven by domestic problems in the US and it really can t be remedied by a globally coordinated action plan, he said. US treasury secretary Henry Paulson said global markets may face a prolonged period of unrest. The current financial turmoil is serious and persisting, Paulson said in prepared remarks issued after the meeting.

As the financial markets recover from this period of stress, as of course they will, we should expect continued volatility as risk is repriced. The G7 leaders urged banks to fully disclose their losses and shore up their balance sheets to help restore the normal functioning of markets. German finance minister Peer Steinbrueck said writeoffs could reach $400 billion.

Going forward, we will continue to watch developments closely and continue to take appropriate actions, individually and collectively, in order to secure stability and growth in our economies, the communique said. Pledges to work together to restore the financial system to health contrasted with divisions over fiscal and monetary policy ahead of the G7 gathering.

Before Saturdays meetings, many in Europe had privately expressed alarm over the US Federal Reserve s aggressive interest rate-cutting stance after it slashed 1.25 percentage points off of the benchmark federal funds rate in less than 10 days in January. The monetary easing, along with a $152 billion US fiscal stimulus package, threatened to open a rift between the United States and its allies over how to prevent the credit crisis from pushing the world into a downturn.

But tensions eased after the European Central Bank stressed the risk to euro zone economic growth, alongside its long-held worry about inflation, signaling that the ECB may soon join the Fed, Bank of England and Bank of Canada in cutting rates. French economy minister Christine Lagarde said she welcomed that change by the ECB, but wanted more:

It s like the overture of a symphony: you are always waiting for what comes next. European leaders were particularly concerned about the strength of the euro which hit a record high against the dollar after the Fed began its cutting rates in September.

However, the currency retreated after the ECB s change of heart. With more pressing economic matters to discuss, foreign exchange issues were relegated to the back burner at Saturday s meeting. The communique contained similar wording as in the October statement, with a focus on encouraging China to allow its yuan currency to appreciate more quickly.

Many G7 leaders think the weak yuan gives China an unfair trade advantage, and have called on Beijing to step up domestic investment to help rebalance the world economy. The statement also urged oil exporters to step up production after oil prices briefly topped $100 per barrel last month. It has since retreated, though it spiked up 4 per cent to $91.77 on Friday its biggest gain in nearly two months amid supply snags and a looming U.S. cold spell.

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