The global economy is set to slowly pull out from its worst recession in six decades, the IMF said, and world leaders aim to help the recovery with a breakthrough in stalled trade talks.
The International Monetary Fund forecast a slightly steeper 1.4 percent global contraction in its latest outlook than in the previous April edition, but saw 2.5 percent growth next year, stronger than the 1.9 percent predicted earlier.
The Fund warned, however, that the world economy and the banking sector at the heart of the financial crisis were not strong enough yet to do without heavy government spending and cheap central bank funds.
“The recovery is coming but it is likely to be a weak recovery,” IMF chief economist Olivier Blanchard said.
Leaders of the Group of Eight industrial nations agreed that despite rounds of interest rate cuts and an estimated $5 trillion in public spending, the recovery was not yet assured and that it was too early to cut off economic lifelines.
“All were of the view that the crisis is a long way from being over. With luck, we have reached the bottom,” German Chancellor Angela Merkel told reporters at the G8 summit in the Italian town of L’Aquila.
The group, made of the United States, Japan, Germany, France, Britain, Italy, Canada and Russia acknowledged in a statement there were still significant risks to financial stability.
Fears that high unemployment and weak consumer spending could strangle the nascent recovery made investors trim riskier bets, with the yen soaring to a five-month high against the dollar and pushing Tokyo stocks 0.5 percent down on Thursday.
The yen’s spike, exacerbated by automatic stop-loss dollar sell orders, was so big that it prompted a government warning that sharp currency moves could jeopardize the world’s No. 2 economy and hurt financial markets.
However, stock markets found some support in bets that the upcoming quarterly earnings reports will offer evidence that the worst of the downturn was over.
U.S. aluminium giant Alcoa Inc appeared to back that view, kicking off the U.S. earnings season after the market close with a smaller loss than analysts had expected.
Asia-Pacific stocks outside of Japan were a touch lower, but Taiwan shares bucked the trend and rose 1.6 percent, buoyed by news of better-than-forecast shipments by Quanta Computer, the world’s largest contract laptop maker.
The July 8-10 G8 summit’s focus shifts on Thursday to talks on global warming and trade with major developing nations, which have complained they are suffering heavily from a crisis that was not of their making.
Hit by shockwaves from the crisis triggered by reckless lending practices by top Wall Street and European banks, China, India and Brazil have all suggested that the world should start seeking a new global reserve currency as an alternative to the dollar. G8 member Russia has also backed the idea.
They have said they may raise this on Thursday after discussing it among themselves on Wednesday. The debate is highly sensitive in financial markets, which are wary of risks to U.S. asset values, and the issue is unlikely to progress very far in L’Aquila.
However, a breakthrough on trade did look within reach.
Diplomats say the G8 and major developing economies should agree to conclude the stalled Doha round of trade talks in 2010.
Launched in 2001 to help poor countries prosper, they have stumbled on proposed tariff and subsidy cuts. “We commit to reach a rapid, ambitious, balanced and comprehensive conclusion of the Doha Development Agenda,” the G8 said in a statement on Wednesday.
A deal would give a much-needed boost to international trade depressed by the crisis and assist the world economy in its slow-burn recovery.
In yet another sign that a return to strong, sustained growth was nowhere in sight, OPEC oil cartel said on Wednesday it could take years for world demand for its oil to recover.
Frustration that an upturn remained elusive and major economies kept losing jobs led to calls for more stimulus spending.
White House budget official Robert Nabors told lawmakers that U.S. President Barack Obama’s administration is not talking of a second stimulus package and the focus was on the $787 billion stimulus program already in place.
Yet when asked about a possible second stimulus plan, White House spokesman Robert Gibbs told reporters Obama “won’t hesitate” to take the steps necessary to help the economy.