G-7 Says Growth May Weaken, Stops Short of Remedies

The Group of Seven nations said the U.S. economy may slow further and erode global growth, while stopping short of proposing specific measures in response.

Downside risks still persist, which include further deterioration of the U.S. residential housing markets, tighter credit conditions and heightened inflation expectations in some countries, a statement by G-7 finance ministers and central bankers said in Tokyo today. They kept up pressure on China to allow the yuan to appreciate and said they'd cooperate on foreign exchange as appropriate.

The G-7 nations are at odds on how to tackle a global slowdown sparked by a U.S. housing recession. The U.S. has encouraged its counterparts to use fiscal policy to revive growth. Japan and Canada say they won't follow suit and Germany argues attention should be paid to the causes of last year's credit- market rout rather than how to limit the economic damage.

A house-price collapse has pushed the world's largest economy close to a recession and the U.S. this week urged the G-7 to follow its example and take prudent action to protect their economies. Treasury Secretary Henry Paulson has negotiated a package, including tax rebates, worth $168 billion with Congress, and the Federal Reserve last month cut its key interest rate twice in nine days to 3 percent, the fastest easing of policy since 1990.

Slowing Growth

In all our economies, to varying degrees, growth is expected to slow somewhat in the short term, the statement said. In the U.S. risks have become more skewed to the downside.

German Finance Minister Peer Steinbrueck and U.K. Chancellor of the Exchequer Alistair Darling said yesterday that scope for coordinated action to shore up the global economy is limited.

The group consists of the U.S., the U.K., Canada, Italy, France, Germany and Japan. China didn't attend the main talks at this gathering.

The G-7 agreed that China should do more to defuse global trade tensions, reflecting European and Canadian concern that their currencies are bearing too much of the burden of the dollar's slide.

While the yuan has climbed 6 percent against the dollar since the October statement, it's risen just 2 percent against the euro in the same period. French Finance Minister Christine Lagarde said today that the stronger euro continues to pose difficulties for European exporters.

China's Yuan

We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate, the statement said. The language is similar to that used by the G-7 at their last meeting in October, when they singled out the yuan.

China overtook the U.K. as the euro area's biggest supplier last year. The euro has gained 11.5 percent against the dollar in the past year.

Global price pressures are making it harder for central banks to coordinate interest-rate policy. While the Bank of England this week cut its benchmark rate for the second time in three months and European Central Bank President Jean-Claude Trichet dropped a threat to raise rates, both central banks stressed inflation risks. October's statement contained no mention of global inflation risks.

May Coordinate Action

The G-7 omitted a commitment made at the last meeting in Washington to fiscal discipline. The group said it was possible they may agree to coordinate action to spur growth and ensure financial stability in the future.

The ECB and the Fed moved in concert with three other central banks in December to alleviate the credit squeeze in the biggest act of international cooperation since the Sept. 11 terrorist attacks.

Going forward, we will continue to watch developments closely and take appropriate actions, individually and collectively, in order to secure stability and growth in our economies, the statement said.

The G-7 pledged to act on the recommendations of the Financial Stability Forum of regulators, which today proposed measures to prevent a repeat of last year's credit crisis.

Italian central bank Governor Mario Draghi, who drafted the report, said banks should publish more information about their losses and improve risk management.

The report also said authorities must address potential conflicts of interest at credit-rating companies and improve understanding of banks' off-balance sheet positions, according to the statement.

The G-7 also asked the International Monetary Fund and the Basel, Switzerland-based Financial Stability Forum to report at the next meeting in April on their respective roles in identifying potential vulnerabilities and enhancing early warning capabilities, it said.