G-7 Draft Says Recovery Should Begin Later This Year (Update1)

By Rainer Buergin and Simon Kennedy

April 24 (Bloomberg) -- Finance chiefs from the Group of Seven predict the world economy will start to rebound later this year as evidence mounts that the worst of the recession is over, according to the draft of a statement to be released after talks in Washington today.

“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 the draft communique obtained by Bloomberg News. “Recent data suggest that the pace of decline in our economies has slowed, and some signs of stabilization are emerging.”

The G-7 officials are wary of declaring an end to the deepest slump since World War II as their economies remain threatened by growing losses at banks and rising unemployment. They pledged to “take whatever actions are necessary to accelerate the return to trend growth.”

“Even if there are some very small signs that the extent of the contraction may be slowing, there is no room for complacency,” said Howard Wheeldon, a senior strategist at BGC Partners LP in London.
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, reports showed today. 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.

‘Encouraging Signs’ 

“There have been some encouraging signs that the global economic downturn may be slackening,” U.S. Treasury Secretary Timothy Geithner wrote in the Financial Times today. “However, real progress requires time, and significant risks and challenges remain.”

Speaking before the talks began, policy makers said the impaired balance sheets of banks are the biggest barrier to recovery as they prevent a revival of lending. 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.

Fixing Banks 

“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 said today the recession and market turbulence have “substantially reduced” reserves at some of the 19 largest U.S. banks, while most of the firms hold capital “well in excess” of regulatory standards. The comment came in a description of stress tests the companies are being subjected to by regulators.

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, according to the draft statement. It repeated that it will “ensure the soundness” of major financial companies.

The risk that recovery isn’t yet assured means policy makers continue to deploy emergency fiscal and monetary measures to keep their economies afloat. The human cost of the crisis is growing, with the IMF and World Bank today warning that 90 million more people may be “trapped in extreme poverty” this year.
“We are swiftly implementing macroeconomic support and we reaffirm our commitment to deliver the scale of sustained fiscal effort necessary to restore growth,” the G7’s draft said.

Group of 20 

In a sign of how important emerging markets are to the world economy in a crisis caused by rich nations, the G-7 officials will meet tonight with counterparts from the Group of 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 draft text repeated that “excess volatility and disorderly movements in exchange rates have adverse implications” for economies. 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.

To contact the reporters on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net; Rainer Buergin in Washington at rbuergin1@bloomberg.net.
Last Updated: April 24, 2009 14:39 EDT