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G-8 ministers expected to talk up economy

business Updated: Jun 10, 2009 20:43 IST

With markets up but still hesitant, finance officials from the Group of Eight countries will try to encourage nascent confidence at their summit in southern Italy as they take stock of measures taken so far to counter the world economic crisis. There is more reason for optimism than when they last met in Rome in February. Among the signs that conditions are improving is the ruling that 10 of the largest U.S. banks are strong enough to repay $68 billion in government bailout money.

The meeting of G-8 finance ministers Friday and Saturday in the southern Italian city of Lecce will include officials from the U.S., Japan, Germany, France, Britain, Italy, Canada and Russia, and will set the agenda for a meeting of G-8 national leaders in July in L'Aquila outside Rome.

Chris Turner, chief international economist for ING Wholesale Banking in London, said he expects ministers to paint as rosy a picture of the economy as they can get away with and work to coordinate national efforts.

"They can't go out and say everything is fine and it isn't but I think they'll try to say the future is brighter and that recovery is right around the corner," Turner said. "They'll want to put that in the context of continuing economic stimulus packages and have these coordinated where possible."

Rising stocks and a raft of recent data have given rise to talk of "green shoots" of future recovery _ building on stronger consumer confidence, housing markets, and retail spending. But most economists warn that the world economy is still searching for the bottom and could find it in the second quarter.

"If there is a time for leaders to meet, it is when crises of such epic proportions are unfolding," Guillaume Menuet, European economist at Merrill Lynch. "Once the worst is past, people tend to quickly forget how serious the situation is. We have contracted a lot. It will likely take years to get back where we were before." With economies still in the trough, Menuet said many nations remain focused on domestic measures to stimulate their economies rather than on international coordination.

The gathering will ensure that the ministers "stay the course set at the last meeting, to ensure that they maximize their chance of being in a position to benefit from the eventual rebound as and when it materializes," Menuet said.

Financial markets have rallied strongly over the last three months largely on better-than-expected economic data, as well as hopes that the financial sector is stabilizing.

"The market is speculating that the global economy will take a turn for the better in the second half, and we think that is right at this stage," Menuet said.

Still, hard data has yet to show improvements, with Germany, Europe's largest economy, reporting a nearly 30 percent drop in exports in April as the global economic crisis continued to hurt demand for its products.

The ministers are expected to repeat warnings made in Rome against protectionism, stressing countries must resist the temptation to favor struggling domestic industries. An all-out trade war hasn't broken out, but some countries' efforts have favored their home businesses. The German government backed the takeover of General Motor's subsidiary Adam Opel GmbH by Magna International Inc. and Russia's Sberbank in return for promises to preserve jobs in Germany, not in the other countries where Opel builds cars.

Also likely to be on the agenda is a discussion of exit strategies from the current economic stimulus programs, such as increased government spending, lower interest rates and measures by the U.S. Federal Reserve and the Bank of England to boost the money supply. Some economists fear these measures will eventually fuel inflation if not withdrawn quickly when the economy improves. "This difficult decision is of when to start tightening by raising rates and closing budget deficits," said Giles Wilkes, CentreForum economist. "Will this happen? We want coordination between countries."