G8: focus on economic recovery first, cost later

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Global economic recovery is not yet guaranteed and governments will worry about the bill for heavy stimulus spending once it has succeeded, world leaders meeting in Italy say.

“While there are signs of stabilization, including recovery in stock markets, a decline in interest rate spreads, improved business and consumer confidence, the situation remains uncertain and significant risks remain to economic and financial stability,” they said in a statement.

Reuters notes that was the same wording as a statement from the group’s finance ministers a month ago and offered no new optimism for markets on a day when the International Monetary Fund said the world economy was starting to emerge from recession.

The leaders, meeting in the earthquake-hit mountain town of L’Aquila for talks that started with the economy, said they were committed to withdrawing stimulus spending, but only when a recovery looked secure.

“We agreed on the need to prepare appropriate strategies for unwinding extraordinary policy measures to respond to the crisis once the recovery is assured,” the statement said.

“The exit strategies will vary depending on economic conditions and public finances, and must ensure a sustainable recovery over the long term.”

IMF analysis would help with this process, it said.

Economists say renewed market concern about recovery meant it made sense to press efforts to ensure the economy rebounds.

“In the last two or three weeks there’s been a bit of a reality check and it’s perfectly sensible for leaders to state that idea,” said Gavin Friend, a strategist at National Australia Bank in London.

Governments worldwide have committed an estimated $5 trillion dollars in public funds to stabilize the banking system and stimulate demand with costly infrastructure building projects and tax breaks.

Before the meetings, officials said German Chancellor Angela Merkel would press others to stress their commitment to rapid restoration of healthy public finances.

But the United States, Britain, Japan and France were keen to keep the focus firmly on recovery, they said.

The G8 — the United States, Japan, Germany, France, Britain, Italy, Canada and Russia — was due to reconvene on Thursday with representatives of emerging market countries including China, India and Brazil.

Chinese President Hu Jintao pulled out of the talks at the last minute because of unrest in northwestern China in which more than 150 people have been killed.

The G8 statement, plus a draft of one prepared for issue on Thursday after talks among G8 and G5 leaders and obtained by Reuters, made no direct mention of currencies, easing market concerns.

China had asked for a debate on global reserve currencies, arguing there should be a shift over time away from a system dependent solely on the US dollar.

“Stable and sustainable long-term growth will require a smooth unwinding of the existing imbalances in current accounts,” the G8 statement said.

News last week that China was pushing for a debate knocked the dollar by a cent versus the euro at one stage, but National Australia Bank’s Friend said the “event risk” now appeared to have dissipated.

Moscow too has been pressing for an alternative.

Andrei Bokarev, a Russian financial official attending the Italy meetings, told reporters in response to a question that it was “quite possible the issue will emerge” during today’s discussions.

There have been some signs since March of improvement in a number of economic indicators but jobless rates are soaring and governments are still wary of the risk of relapse.

The IMF said in revised forecasts yesterday that the economy was stabilizing but that a sustained recovery would probably not happen until the second half of 2010 in the industrialised world where the trouble began.

It forecast a global economic contraction of 1.4% in 2009 followed by expansion of 2.5% in 2010, which is 0.1 percentage points better for this year and 0.6 points better next year than it was forecasting in April.



Pic: Anti-G8 protesters in Manila yesterday. Cred: Reuters