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G7 pledges to keep up stimulus

Too soon to declare victory in fight against financial crisis, ministers agree at meeting in Istanbul

Finance ministers and central bankers from the Group of Seven nations, diminished by the emergence of the G20 yet still responsible for economies that account for two-thirds of the world’s gross domestic product, pledged to maintain stimulus measures because a sustained rebound from recession remains elusive.

Meeting in Turkey’s financial capital a day after a government report showed the U.S. unemployment rate climbed to 9.8 per cent in September, officials from countries such as Germany and Canada said it was too soon to declare victory in a fight they have been waging against the financial crisis for more than a year.

“There is no room for complacency since the prospects for growth remain fragile and labor market conditions are not yet improving,” the G7 ministers and central bank chiefs said in a statement at the conclusion of their three-hour meeting Saturday. “We will keep in place our support measures until recovery is assured.”

Employment notwithstanding, economic indicators around the world such as factory production and consumer confidence suggest the global economy is growing again after enduring the deepest recession since the Second World War. The International Monetary Fund revised its outlook for economic growth next year to 3.1 per cent from a 2.5 per cent estimate in July.

That revival has come at a cost of some $2-trillion U.S. in discretionary measures aimed at stoking demand and creating jobs. Deficits and debt levels have jumped, inviting criticism from political opponents and concern on the part of some investors that all the spending will cripple some of the world’s biggest economies.

The G7’s statement is the latest effort to push back against that pressure, which mirrors the conditions that led to hasty attempts to rein in public spending that ended up deepening both the Great Depression and Japan’s bout with deflation in the 1990s.

A 3.1 per cent rate of growth pales against the 5.2 per cent growth rate the world economy reached in 2007. Policy makers remain worried that private demand has yet to kick in, and economists are more and more vocal in emphasizing the risk that the economy could rebound without creating a significant number of new jobs.

The U.S. unemployment rate the Labour Department recorded this week was the highest since 1983. The IMF warned that unemployment rates in the U.S. and Europe likely will climb above 10 per cent. Another report this week showed that Canada’s GDP didn’t grow in July, a surprise to many economists because the Bank of Canada predicted last month that Canada’s recession ended in the third quarter.

“It is the time to discuss exit strategies, but it isn’t the time to implement them because of the fragility of the recovery,” Finance Minister Jim Flaherty said after the meeting.

The G7 includes the U.S., Japan, Germany, Britain, France, Italy and Canada.

Last week in Pittsburgh, leaders from a broader collective, the Group of 20, which includes the G7 nations and bigger emerging markets such as China and Saudi Arabia, declared the G20 would usurp the G7 as the world’s premier forum for discussing economic policy.

Nevertheless, the G7 finance ministers and central bankers, in Turkey for several days to attend the annual meetings of the International Monetary Fund and the World Bank, opted to maintain a forum that dates back to the mid-1970s.

“There are going to be lots of issues in the future where the G7 will be able to co-operate,” U.S. Treasury Secretary Timothy Geithner said at a press conference. “That’s not going to change.”

The G7’ s concern over volatility in currency markets certainly hasn’t changed.

Finance ministers and central bankers repeated language from their last meeting in February that “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability” and that they “continue to monitor exchange markets closely, and cooperate as appropriate.”

They also maintained what amounts to a polite dig at the Chinese government to loosen its controls on its currency, saying they “welcome China’s continued commitment to move to a more flexible exchange rate, which should lead to continued appreciation of the renminbi in effective terms and help promote more balanced growth in China and in the world economy.”

Any commentary on exchange rates is sensitive, and Bank of Canada Governor Mark Carney declined to elaborate on the risks volatile exchange rates pose to the recovery, saying the statement speaks for itself.

Ahead of today’s meeting, Mr. Flaherty and various European officials expressed concern about recent weakness of the U.S. dollar, which is causing their currencies to appreciate to the detriment of Canadian and European exporters.

The dollar, which fell about 10 per cent against the euro and yen in the past two quarters, advanced this week to its highest level versus the euro in almost a month after policy makers criticized its drop, according to Bloomberg News. It traded at $1.4576 per euro and 89.81 yen at the end of trading yesterday in New York, according to the new agency’s data.

Sophia Drossos, a currency strategist at Morgan Stanley in New York, said the reiteration of the G7’s existing position on currencies could cause the dollar to decline because traders were bracing for a suggestion that the G7 was prepared to intervene in markets to strengthen the dollar.

“This is likely to be interpreted as suggesting the G7 officials are tolerant of recent (foreign exchange) moves,” Ms. Drossos said. “If the G7 wanted to push back more forcefully, they could have.”

The G7 might have avoided saying more on exchange rates because its members accept that in a world where China and India account for half of all global economic growth, their ability to influence market sentiment is fading, said Eric Helleiner, the Waterloo, Ont.-based Centre for International Governance Innovation’s chair in international economic governance.

Last week, the G20 leaders pledged to avoid domestic policies that harm the global economy. The idea is to smooth out imbalances in supply and demand by encouraging U.S. consumers to save more and getting big exporters such as China and Germany to work harder at selling their excess production at home.

Exchange rates are key to that, as a higher exchange rate in China would make imports cheaper and its exports more expensive. While the G7 has attempted to influence exchange rates in the past, the commitment by the G20 to take on the issue of “imbalances” suggests that is the proper place for any joint effort on currencies, Mr. Helleiner said.

“The G7 are not adding anything more and they are not the right grouping to do so anyway given the geography of global imbalances,” Mr. Helleiner said.