Economic recovery is too weak to withdraw stimulus, says G-8

Economic recovery is too weak to withdraw stimulus, says G-8
The Financial Express, July 10, 2009, Page 18

Bloomberg

Group-8 leaders said the economic recovery from the steepest recession since World War II is too fragile for them to consider reversing efforts to pump money into the economy.

President Barack Obama pressed for the door to remain open to more stimulus measures, as a renewed stock-market drop stirred concern that $2 trillion spent worldwide so far hasn’t jolted consumers and businesses back to life. “The G-8 needed to sound a second wakeup call for the world economy,” British Prime Minister Gordon Brown told reporters in L’Aquila , Italy , on Wednesday after the opening sessions of the leaders’ annual gathering. “There are warning signals about the world economy that we cannot ignore.”

Divergences over what to do next and calls from developing nations to do more to counter the slump underscored the G-8’s limited room for maneuver. The biggest borrowing spree in 60 years has failed to halt rising unemployment and left investors doubting the strength of the recovery. The MSCI World Index of stocks slid for a fifth day. The 23-nation index has dropped 8% since a three-month rally ended on June 2.

“We’ve been advocating stimulate now, consolidate later,” Angel Gurria, secretary general of the Organisation for Economic Cooperation and Development, said on Thursday. “You’re not going to remove the stimulus now. It’s too early.”

The International Monetary Fund echoed that skepticism, upgrading its 2010 growth forecast while saying the rebound will be “sluggish” and urging governments to stay the economic- stimulus course.

Emerging countries like China will lead the way, expanding 4.7% next year, the IMF said on Wednesday, up from an April prediction of 4%. The Washington-based lender forecast a growth of 0.6% for advanced economies, up from expectations of stagnation.

“It’s a very volatile situation,” European Commission president Jose Barroso said in L’Aquila . “We are not yet out of the crisis, but it seems now that the free fall is over.”

In the US , a jump in the jobless rate to a 26-year-high of 9.5% in June and a 6.9% drop in the Standard & Poor’s 500 Index in the past month raised questions whether Obama’s $787-billion stimulus package is turning the world’s largest economy around.

Democrats in Congress are split over whether to spend more, adding to a deficit that the IMF puts at 13.6% of gross domestic product in 2009, the highest since World War II.

Obama has straddled the issue, saying that spending more borrowed money is “potentially counterproductive.”

A G-8 statement on Wednesday embraced options ranging from the second US stimulus package some lawmakers and economists are advocating to Germany ‘s emphasis on shifting the focus to deficit reduction. “Exit strategies will vary from country to country depending on domestic economic conditions and public finances,” leaders of the eight economies---the US, Japan, Germany, Britain, France, Italy, Canada and Russia---said in the statement .

“There is still uncertainty and risk in the system,” Mike Froman , deputy US national security adviser, told reporters in L’Aquila . While exit strategies can be drawn up, it’s not “time to put them into place.” Bank bailouts and recession-fighting measures will explode the debt of the advanced economies to at least 114% of gross domestic product in 2014, the IMF forecasts.

German chancellor Angela Merkel is the leading opponent of additional stimulus, pushing through a statement at last month’s European Union summit that called for “a reliable and credible exit strategy.” Merkel, campaigning for re-election in September, has warned against billowing budget deficits, which will rise in the EU to an average of 6% of GDP in 2009 from 2.3% last year, the EU forecasts. “We have to get back on course with a sustainable budget, but with the emphasis on when the crisis is over,” Merkel said.

The 16-nation euro economy has shown some signs of resilience since shrinking 2.5% in the first quarter, the most since the currency’s birth in 1999. While measures of business confidence, manufacturing and services have ticked up, job cuts by companies from Austrian Airlines AG to ThyssenKrupp AG pushed up unemployment to 9.5% in May, a 10-year high.