World economy still faces significant risks: G-8 leaders

World economy still faces significant risks: G-8 leaders
The Financial Express, July 9, 2009, Page 18

Reuters, L’Aquila, Italy

G-8 leaders believe the world economy still faces “significant risks” and may need further help, according to summit draft documents that also reflect failure to agree climate change goals for 2050.

Discord over environmental measures was underlined by withdrawal from the meeting of Chinese President Hu Jintao, who returned to Beijing because of unrest in northwestern China in which 156 people have been killed.

Documents seen by Reuters ahead of a G-8 summit cautioned that “significant risks remain to economic and financial stability”, while “exit strategies” from pro-growth packages should be unwound only “once recovery is assured”. “Before there is talk of additional stimulus, I would urge all leaders to focus first on making sure the stimulus that has been announced actually gets delivered,” Canadian Prime Minister Stephen Harper said before the summit began.

Leaders met in L’Aquila, a mountain town wrecked by April’s earthquake and a fitting backdrop to talks on a global economy struggling to overcome the worst recession in living memory. The Group of Eight—United States, Germany, Japan, France, Britain, Italy, Canada and Russia—will kick off with debate on the economic crisis, after what one analyst called a “reality check” in recent weeks on the prospects for rapid recovery. G-8 leaders badly underestimated the economic problems facing them when they met in Japan last year and will now focus on what must be done to prevent another meltdown.

“Although there have been signs of stability in the economy and the sentiment has improved, the real economy has not recovered yet with job and wage conditions still stagnant,” said Takao Hattori, senior strategist at Mitsubishi UFJ Securities.

But few big initiatives are expected as the G-20, a broader forum that also includes the main emerging economies, is tasked with formulating a regulatory response to the crisis and meets in September in Pittsburgh after an April summit in London.

Not mentioning China’s push for a sensitive debate about a long-term alternative to the dollar as global reserve currency, the draft talked only of global “imbalances”. G-8 diplomats had said this might be the only oblique reference to currency. “Stable and sustainable long-term growth will require a smooth unwinding of the existing imbalances in current accounts,” read the draft prepared for the G-8 talks.

China complains that dollar domination has exacerbated the global crisis and worries that the bill for US recovery poses an inflation risk for China’s dollar assets, an estimated 70% of its official currency reserves.