By Simon Kennedy
April 24 (Bloomberg) -- Finance chiefs from the Group of Seven meet today under pressure to ensure the green shoots of economic recovery take stronger root.
Unemployment, deflation and toxic bank assets still stand in the way of a permanent rebound from the deepest recession since World War II. While some reports signal the worst is over, investors want the G-7’s central bankers and finance ministers to maintain stimulus policies until expansion is assured.
“Policy makers have to keep their feet on the accelerator,” said Tim Adams, a former U.S. Treasury official and now managing director at the Lindsey Group, an investment consulting firm in Fairfax, Virginia. “It’s way too early to say we’re in a sustainable recovery.”
Treasury Secretary Timothy Geithner, European Central Bank President Jean-Claude Trichet and their G-7 colleagues gather in Washington two days after the International Monetary Fund cut its forecasts for each of their economies. As global stocks head for their first weekly decline in seven, the IMF predicts the global recession to be deeper and the recovery slower than it anticipated in January.
The G-7 will release a statement about 4:30 p.m. Washington time today and officials will speak to reporters afterwards. They will later meet counterparts from the Group of 20 nations.
‘Foster Confidence’
“We need to make sure we provide a scale of support that matches the intensity of the challenge,” Geithner said April 22. French Finance Minister Christine Lagarde said yesterday that policy makers “need to be very prudent, very careful and just keep focusing on what we have to do.”
“At this juncture, it’s too early to tell if” a recovery is under way, Bank of Japan Governor Masaaki Shirakawa said in New York yesterday.
Reports from governments and companies this week also cautioned against complacency. In the U.S., the number of Americans filing first-time applications for unemployment insurance rose last week to 640,000 and March sales of previously owned homes fell more than forecast. European industrial orders dropped the most in at least 13 years in February.
Japan’s second-largest bank, Mizuho Financial Group Inc., yesterday reported a wider-than-estimated loss as bad loans spiraled. Caterpillar Inc., the world’s largest maker of bulldozers and excavators, posted its first quarterly net loss in 16 years.
‘Encouraging Signs’
Such gloom is offsetting what Canadian Finance Minister Jim Flaherty calls “small, encouraging signs” in the global economy. U.S. consumer confidence advanced this month to the highest level since the bankruptcy of Lehman Brothers Holdings Inc., German investor confidence rose to the highest in almost two years and Japan’s export slump slowed.
Banks are also now more willing to lend than at any time since before Lehman’s collapse in September, according to the gap between London interbank offered rate and the expected average federal funds rate over the next three months.
Policy makers are nevertheless refusing to sound the all clear and are still deploying emergency measures to keep their economies afloat. The Bank of Canada this week cut its key lending rate to a record low of 0.25 percent and said it plans to keep it there for more than a year. Japan this month unveiled a 15.4 trillion yen ($160 billion) stimulus package.
“The world economy is no longer falling off a cliff, but it’s too soon to say this recovery is sustainable,” said Axel Botte, strategist at Axa Investment Managers in Paris, which manages about $630 billion. “Policy makers need to reaffirm their commitments to helping the financial sector and economies.”
Nature of Crisis
They need to be relentless because of the nature of the crisis. An IMF study of 122 recessions concluded that synchronized slumps last 50 percent longer than more localized ones. It also found that downturns sparked by financial busts last longer than those caused by tight economic policies, oil shocks or sliding exports.
That means a fitful outlook for stocks too, said Alec Young, an equity markets strategist with Standard & Poor’s in New York. The MSCI World Index this week fell about 2 percent after rising for six straight weeks.
“Markets will likely be higher in a year’s time, but we would not be surprised to see some near-term consolidation of the recent advance as investors await more evidence of improvement,” Young said.
Bank Losses
One barrier to recovery is posed by banks’ balance sheets, which are still clogged with distressed assets and may make financial institutions more reluctant to lend. The IMF estimates worldwide losses tied to bad loans and securitized assets may reach $4.1 trillion by the end of 2010.
“You never recover before you clean up the balance sheets,” IMF Managing Director Dominique Strauss-Kahn told Bloomberg Television yesterday.
With access to cash limited, deflation remains another threat to demand. The IMF predicts consumer prices will drop 0.2 percent in advanced economies this year. U.S. prices posted their first annual decline since 1955 in March and the rate that U.K. wage bargainers use to gauge the cost of living fell for the first time in almost half a century.
An increase in worldwide unemployment from 5.3 percent to 8.5 percent, the highest in more than a decade, will provide another “powerful disinflationary force that will reverberate throughout the global economy,” said David Hensley, an economist at JPMorgan Chase & Co. in New York.
Fiscal Constraints
The dilemma for major governments is that they are running out of room to act after committing more than $2 trillion in lower taxes and higher spending.
The U.K. plans to sell a record 220 billion pounds ($321 billion) of government bonds this year to plug the largest budget deficit gap in the G-20. The Obama administration has increased U.S. marketable debt to an unprecedented $6.27 trillion as it predicts a record $1.75 trillion budget gap this year.
“Fiscal fatigue is starting to set in,” said Ethan Harris, co-chief U.S. economist at Barclays Capital in New York. If current policies “do not work in reviving growth there is a significant risk to the global economy.”
To contact the reporter on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net
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