Finance chiefs from the Group of Seven predicted a “weak” economic recovery will start to take hold in coming months as evidence mounts that the worst of the recession is over.
“Economic activity should begin to recover later this year amid a continued weak outlook, and downside risks persist,” the G-7 finance ministers and central bankers said in a statement yesterday after talks in Washington. “Recent data suggest that the pace of decline in our economies has slowed, and some signs of stabilization are emerging.”
While more upbeat than when they met in February, the officials are wary of declaring an end to the deepest slump since World War II so long as toxic assets continue to impede bank lending. They pledged to “take whatever actions are necessary to accelerate the return to trend growth” without announcing any new steps.
“We’ve been in a deep financial crisis, and you don’t bounce out of this like a normal recession,” Harvard University Professor Kenneth Rogoff said in an interview with Bloomberg Television in Washington. “There will be a period of slow growth.”
Two months ago the G-7 predicted the “severe downturn” would persist through most of this year. Since then their economies have appeared to steady. Data released yesterday alone showed purchases of new homes in the U.S. were higher than forecast in March and German business confidence rebounded from a 26-year low this month.
U.K., Germany Shrink
Still, the U.K. economy shrank in the first quarter by more than anticipated, and Bundesbank President Axel Weber said Germany’s economy probably contracted 3 percent over the same period, which would be the most on record.
“There are signs that the pace of deterioration in economic activity and trade flows has eased,” U.S. Treasury Secretary Timothy Geithner told reporters. “We are right to be somewhat encouraged, but we would be wrong to conclude that we are close to emerging from the darkness.”
Company reports this week highlighted how some are beginning to escape the gloom as others falter. Caterpillar Inc., the world’s largest producer of bulldozers, posted its first quarterly net loss in 16 years and Germany’s Robert Bosch GmbH, the biggest car-parts maker, projected a 2009 loss. Meantime, AT&T Inc., the biggest U.S. phone company, posted first-quarter profit that topped forecasts and Debenhams Plc, the U.K. retailer, announced improving sales and margins.
Policy makers identified the impaired balance sheets of banks as the biggest barrier to recovery. The International Monetary Fund calculates global losses tied to bad loans and securitized assets may reach $4.1 trillion next year. It estimates banks face further writedowns of $550 billion in the U.S. and $750 billion in the euro area.
“The No. 1 issue is to repair the financial system,” Canadian Finance Minister Jim Flaherty said in an interview. U.K. Chancellor of the Exchequer Alistair Darling said, “If we do not fix the banks, we will not fix the economy.”
The Federal Reserve yesterday released the methods it used to conduct stress tests of the biggest U.S. banks, while stopping short of any details that signaled how much new capital regulators will demand. The results of the examinations are due to be released May 4.
Japan’s second-largest bank, Mizuho Financial Group Inc., two days ago reported a wider loss than forecast as bad loans spiraled. Morgan Stanley on April 22 reported a bigger-than- estimated $177 million loss as real estate and debt-related writedowns overwhelmed trading gains.
At the same time, banks are now more willing to lend than at any time since before the collapse of Lehman Brothers Holdings Inc. in September, according to the gap between the London interbank offered rate and the expected average federal funds rate over the next three months.
The G-7 said it will “act as needed” to restore lending, provide liquidity support, inject capital into financial institutions, protect savings and address stressed assets. It repeated that it will “ensure the soundness” of key financial companies.
The fact that recovery isn’t yet assured means policy makers continue to deploy emergency fiscal and monetary measures. The Group of 20 economies have committed more than $2 trillion in tax cuts and spending increases, while top central banks have reduced interest rates to record lows.
“It’s no time for complacency,” European Central Bank President Jean-Claude Trichet said. “We have to continue to work very, very actively.”
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 outlive those caused by tight economic policies, oil shocks or sliding exports.
The IMF this week predicted the global recession will be deeper and the recovery weaker than it thought in January as it cut its forecast for each of the G-7 economies this year and next.
The human cost of the crisis is also growing, with the IMF and World Bank yesterday warning that 90 million more people may be “trapped in extreme poverty” this year. Unemployment is also set to rise globally from 5.3 percent to 8.5 percent, the highest in more than a decade, as companies such as Yahoo! Inc. cut staff, according to JPMorgan Chase & Co.
In a sign of how important emerging markets are to solving a crisis caused by rich nations, the G-7 officials met with counterparts from the G-20. “Many countries are now playing a major role in the global economy and we welcome their contribution to the collective international effort to promote recovery,” the G-7 said.
The group repeated that “excess volatility and disorderly movements in exchange rates have adverse implications” for economies and markets. It again welcomed China’s commitment to a “more flexible” currency and said that should encourage a continued appreciation of the yuan in effective terms.
The officials also said they would refrain from “raising new barriers” to trade even after the World Bank said that the U.S., U.K., Germany, France and Italy had all introduced protectionist measures since the G-20 made a similar commitment on April 2.