G-7 Offers Optimistic Assessment of Global Growth (Update2)
By Farah Nayeri, Iain Rogers and Mayumi Otsuma
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Those who did not deliver blaimed economy, those who just lowered modestly guidance say it is two quarter slowdown.
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Palermo, Italy, Feb. 17 (Bloomberg) -- Finance ministers and central bankers from the Group of
Seven major industrial nations said the global economy will avoid recession, even as they called
on the U.S. and Japan to do more to ensure expansion.
``Global growth will be mainly good this year, though somewhat lower than we expected'' when
the G-7 ministers met last September in Prague, said Italian Treasury Minister Vincenzo Visco,
who hosted today's meeting.
Currencies, usually a major topic for the G-7, received only a brief mention in the statement
released after the meeting in Sicily, suggesting the world's economic chieftains are happy with the
relative values of the yen, euro, and dollar.
In their statement, the ministers ``reiterated our view that exchange rates among major currencies
should reflect economic fundamentals.''
They pledged to ``continue to monitor developments closely and to cooperate in exchange
markets as appropriate,'' language almost identical to that of past G-7 communiqu‚s.
U.S. Optimism
Although growth in the U.S. has slowed, the ministers and central bankers offered an upbeat
assessment of prospects for the world's largest economy.
``We agreed that the fundamentals for sustained growth remain in place,'' Treasury Secretary Paul
O'Neill said.
The G-7 called on American policymakers to use monetary and fiscal policy to boost growth,
implicitly offering support for lower interest rates and tax cuts in the U.S.
At the same time, the ministers warned neither should be overdone, calling on U.S. officials to
preserve ``budgetary restraint and price stability.''
Briefing his counterparts today, Federal Reserve Chairman Alan Greenspan said that most recent
U.S. economic data are encouraging, and that growth since the first of the year had been stable.
The outlook for the Japanese economy, which contracted 0.6 percent in the third quarter, isn't as
good. The G-7 forecast only a ``modest recovery'' in the world's second largest economy, and
warned of the possibility of deflation.
``Prices continue to decline and downside risks remain,'' the ministers said.
Interest Rate Cuts
The Bank of Japan raised its benchmark overnight call rate in August to 0.25 percent from an
effective rate of zero, saying at the time that the economy was recovering and the threat of
deflation had disappeared.
Consumer prices, however, were down 0.2 percent in the year ending in December, and the
central bank said recently prices ``will remain somewhat weak.''
The ministers suggested the BOJ again cut rates, saying the central bank should use monetary
policy to ``ensure that liquidity is provided in ample terms.''
BOJ Governor Masaru Hayami said the central bank had done enough when it cut the symbolic
discount rate by 15 basis points to 0.35 percent. ``We have provided ample liquidity to financial
markets,'' Hayami said after the meeting. The G-7 demand ``is consistent with our current policy.''
Japan's third quarter contraction has raised concerns the country could slip back into recession
after just two quarters of growth. The economy has lagged the other major industrial economies for
much of the last decade.
Japanese Bank Concerns
The ministers urged Japan to take immediate steps to clean up its banking system. Sliding stocks
could spark a crisis as the value of shares held by banks declines, eroding their capital, hurting
their ability to dispose of bad loans and driving weak banks into insolvency.
``As long as those bad loans remain on banks' balance sheets, the banks are weakened,'' said
Japanese Finance Minister Kiichi Miyazawa.
Growth prospects remain ``favorable'' in Europe, the U.K. and Canada, the ministers said.
European leaders should continue ``coordinated reform efforts aimed at increasing product and
labor market efficiency,'' the statement said.
The 12 nations sharing a common currency, the euro, are expected to grow at a faster pace this
year than the U.S., for the first time in a decade.
``Europe at the moment is the most stable region of growth in the world, with the economy
expanding about 3 percent, solid economic fundamentals, and sustained domestic demand,''
French Finance Minister Laurent Fabius said in an interview.
Russian Debt Demand
Russian officials were told to pick up the pace of reform, and warned the G-7 members will not
reschedule Soviet-era debt payments due this year.
``We strongly urge the Russian authorities to step up the process of economic reforms and meet
in full their financial obligations,'' the ministers said in their statement.
Russia owes a total of $48 billion, of which $5.9 billion is owed this year. Russian Finance
Minister Alexei Kudrin told G-7 finance ministers his country will meet its commitments, a pledge
Moscow hopes will improve prospects for full-fledged membership in the Group of Eight.
The ministers' statement made it clear the Russian government still has much to do. ``Critical
challenges remain,'' including enforcing contract laws, strengthening the banking system, and
fighting money laundering.
High oil prices drew G-7 concern again. While prices haven't jumped recently, they haven't fallen
as much as analysts had expected. That's contributed to slower economic growth by eroding
consumers' purchasing power.
``Lower energy prices and stable oil markets are important'' for the health of the world economy,
the finance ministers and central bankers said.
O'Neill Debut
The limited statement on currencies was an about-face from their last meeting in Prague, on Sept.
24. A day earlier, G-7 nations sold dollars and bought euros on concern that a slide in the single
currency may cause global economic turmoil.
Since that time, the euro and the yen have been relatively stable against the dollar, with the euro
up 4 percent and the yen posting a 7 percent loss.
Currency policy made O'Neill's debut on the world stage a rocky one. Investors interpreted
remarks he made in an interview published in a German newspaper Friday as a signal the U.S.
would back away from its long-held strong-dollar policy. The yen and euro both rose against the
dollar yesterday, fueled in part by O'Neill's comments.
Following today's meeting, O'Neill was at pains to insist U.S. dollar policy was unchanged.
``I believe in a strong dollar. I'm not ever going to change that,'' O'Neill said, ``unless you hear a
brass band blaring behind me in Yankee Stadium.''
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