The world’s top industrial nations are set to warn on Wednesday that economy recovery is by no means secure, a point backed by news of U.S. consumers falling behind on their bills and a dive in Japanese machinery orders.
Leaders of the Group of Eight nations will start their annual meeting with a discussion of the economic outlook and will agree that the world economy is still too weak to remove stimulus measures, European officials said.
Speaking on the eve of the summit, British Prime Minister Gordon Brown told Reuters the world had to wake up to the scale of the downturn and stay focused on restarting growth.
“I am not complacent and remain vigilant about the financial state of the world,” said Brown.
That weakness was highlighted by U.S. data showing record high delinquencies on credit-card debt and home equity loans, along with an unexpected drop in Japanese machinery orders that boded ill for business investment in the world’s No. 2 economy.
Talk that the $787 billion U.S. stimulus package may have to be topped up added to uncertainty about the U.S. and global economic upturn, prompting investors to unwind their recovery bets and favour safe havens, such as the dollar and government bonds.
Wall Street and Asian stocks fell, with Japan’s Nikkei average sliding 2 percent to a six-week low on Wednesday. Shares elsewhere in Asia-Pacific were down 1.9 percent and oil plumbed a six-week low near $62 per barrel.
NO DEMAND IN SIGHT
The value of Japan’s core private-sector machinery orders, a leading indicator of capital spending, slumped 3 percent in May to a record low, defying expectations of a 2.1 percent rise.
Analysts saw little chance of a near-term recovery as doubts about the strength of demand both domestically and abroad mean Japanese companies lack the confidence to boost their spending.
“Capital spending will not stop falling until the final quarter of this year,” said Azusa Kato, an economist at BNP Paribas.
Rounds of furious interest rate cuts and trillions of dollars in public funds helped prevent the deepest global recession in decades from turning into a depression and financial markets have seized on signs that the worst of the crisis was over.
However, doubts whether consumers and private businesses will be ready to ramp up spending any time soon prompted warnings that governments would risk killing the recovery if they withdrew stimulus spending too quickly.
OECD Secretary General Angel Gurria weighed into the debate saying that the economy was not ready yet to recover on its own.
“The name of the game is to move from a policy-driven recovery, which we have now … to a self-sustaining growth,” Gurria told Reuters in an interview.
“You go headfirst into nosedive if you do not have the structures that hold up self-sustaining growth. It’s not there; it’s as simple as that,” said Gurria, who heads the Organization for Economic Cooperation and Development, a club of mostly wealthy nations.
Much of the stimulus money pledged by governments around the world has yet to feed into the economy, but fears that high unemployment and more job losses ahead may strangle any nascent recovery have prompted calls for even more spending.
A member of President Barack Obama’s budget office will tell Congress on Wednesday that while the stimulus plan enacted in February was slowing “the economic freefall,” the federal government was ready to do more to save jobs.
“The President is not satisfied — and will not be satisfied — until we are adding jobs again, providing Americans with the dignity of a job and a dependable income,” Robert Nabors, deputy director of the Office of Management and Budget, said in prepared testimony obtained by Reuters. “That’s why we will continue to do whatever is necessary to put Americans back to work.”
The prospect of another stimulus was also raised by U.S. House of Representatives Majority Leader Steny Hoyer and one of Obama’s economic advisers.
In a familiar pattern of past weeks, signs of persistent economic weakness were punctuated by some encouraging data.
Industrial orders in Germany, Europe’s largest economy, rose at the fastest monthly pace in nearly two years in May, Australian consumer confidence hit a 19-month high this month and a British survey showed a similar rise in confidence in June.
But downbeat market mood shows investors have all but given up hopes for a rapid recovery, with the prevailing view now that the world economy will not heal until some time next year.
Britain is set to unveil on Wednesday measures that largely implement pledges agreed at the global and European level to plug regulatory gaps highlighted by the credit crunch that knocked the world economy into recession.
But no such initiatives on an international scale are expected at the G8 summit that takes place in the Italian city of L’Aquila which was wrecked by an earthquake earlier this year.
China, Russia and Brazil are expected to use the summit to push their view that the world needs a new global reserve currency as an alternative to the dollar.
But it is unclear how aggressive Beijing will be in promoting that idea after President Hu Jintao abandoned plans to attend the gathering on Wednesday, returning home early to deal with ethnic violence that has left at least 156 dead in China’s northwestern region of Xinjiang.