G8 leaders in no hurry to turn off pump

Group of Eight leaders say the economic recovery from the steepest recession since World War II is too fragile for them to consider reversing efforts to pump money into the economy.

US President Barack Obama pressed for the door to remain open to more stimulus measures as a renewed stock-market drop stirred concern that US$2 trillion ($3.2 trillion) spent worldwide so far hasn't jolted consumers and businesses back to life.

"The G8 needed to sound a second wakeup call for the world economy," British Prime Minister Gordon Brown said yesterday in L'Aquila, Italy, after the opening sessions of the leaders' annual gathering. "There are warning signals about the world economy that we cannot ignore."

Divergences over what to do next and calls from developing nations to do more to counter the slump underscored the G8's limited room for manoeuvre.

The biggest borrowing spree in 60 years has failed to halt rising unemployment and left investors doubting the strength of the recovery.

The MSCI World Index of stocks slid for a fifth day. The 23-nation index has dropped 8 per cent since a three-month rally ended on June 2.

"Economies still need as much stimulus as possible," said David Page, an economist at Investec Securities in London. "It's important not to react too soon to early signs of a pickup or take false comfort from them."

The International Monetary Fund echoed that scepticism, upgrading its 2010 growth forecast while saying the rebound would be "sluggish" and urging governments to stay the economic-stimulus course (see story below).

"It's a very volatile situation," European Commission President Jose Barroso said. "We are not yet out of the crisis, but it seems now that the freefall is over."

In the US, a jump in the jobless rate to a 26-year-high of 9.5 per cent in June and a 6.9 per cent drop in the Standard & Poor's 500 Index in the past month raised questions whether Obama's US$787 billion stimulus package is turning the world's largest economy around.

Democrats in Congress are split over whether to spend more, adding to a deficit that the IMF puts at 13.6 per cent of gross domestic product in 2009, the highest since World War II.

Obama straddled the issue yesterday, telling ABC News that spending more borrowed money is "potentially counterproductive".

A G8 statement embraced options ranging from the second US stimulus package some lawmakers and economists are advocating to Germany's emphasis on shifting the focus to deficit reduction.

"Exit strategies will vary from country to country depending on domestic economic conditions and public finances," leaders of the eight economies - US, Japan, Germany, Britain, France, Italy, Canada and Russia - said in the statement.

Bank bailouts and recession-fighting measures will explode the debt of the advanced economies to at least 114 per cent of GDP in 2014, the IMF forecasts.

German Chancellor Angela Merkel is the leading opponent of additional stimulus, pushing through a statement at last month's European Union summit that called for "a reliable and credible exit strategy".

Merkel, campaigning for re-election in September, has warned against billowing budget deficits, which will rise in the EU to an average of 6 per cent of GDP in 2009 from 2.3 per cent last year, the EU forecasts.

Canadian Prime Minister Stephen Harper occupied the middle ground, saying the first priority is to spend wisely what has already been committed.

"Before there's talk of additional stimulus, I would urge all leaders to focus first on making sure that the stimulus that's been announced actually gets delivered," Harper said.

Russia, a G8 member generally classified as an "emerging" economy, also believes that exit strategies "have to be developed already now", said Andrei Bokarev, a Russian official.

- BLOOMBERG