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Global Economic Slide May Be Easing as G-20 Gathers

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2 Apr 09 | Bloomberg

Leaders of the most powerful nations are meeting amid signs that the world economy is stabilizing after months of freefall.


The Group of 20 summit convened in London as some reports suggest the pace of decline is easing. U.S. durable-goods orders and home sales rose in February, Chinese urban investment surged 26.5 percent in the first two months of the year, and German investor confidence in March reached its highest level since July 2007. The Standard & Poor’s 500 Index last month gained the most in seven years.

Policy makers must still contend with plenty of bad news: The World Bank is warning of an “unemployment crisis,” and the U.S. Labor Department is forecast to report tomorrow that the jobless rate is now the highest in a quarter-century. The challenge for the G-20 is to turn the early indications that the worst is over into a fully fledged recovery.

“If you look at history, equity markets rally before the economy does,” said Alastair Newton, a political analyst at Nomura International and a former U.K. government official. “With the worst in unemployment to come, there’s still pressure on the leaders to act.”

Stocks climbed today, driving the MSCI World Index higher for a third day, while Treasuries and the yen declined on speculation that the international downturn is abating.

Advancing Agenda

U.S. President Barack Obama, U.K. Prime Minister Gordon Brown and their G-20 counterparts — responsible for 85 percent of the world economy — gathered to push along an agenda aimed at ending the slump and avoiding a repeat of the financial crisis that caused it. They are scheduled to release a statement and hold press conferences about 3 p.m.

The talks began as officials signaled they will endorse as much as $500 billion in new cash for the International Monetary Fund, seek to revive trade finance and reject protectionism. Initiatives to rein in toxic assets, hedge funds, derivatives trading, executive pay, tax havens and excessive risk-taking by financial firms are also in the works.

“We’re going to see a united front,” John Lipsky, the IMF’s first deputy managing director, said in an interview with Bloomberg Television today. The G-20 will take “decisive action.”

Bracing for Protests

With police sealing off the talks from protesters with a ring of barricades, there are signs of discord among the policy makers, too. French President Nicolas Sarkozy and German Chancellor Angela Merkel yesterday said an agreement on specific ways to tighten regulation was still some way off, while Japanese Prime Minister Taro Aso criticized Germany’s unwillingness to boost spending.

“We must stand united in our determination to do whatever is necessary,” Brown said yesterday. Merkel said she and Sarkozy “want results, but we don’t want results that have no effect in practice.”

Evidence is building that the deepest global recession since World War II may be easing — giving comfort to those who say the G-20’s $2 trillion of fiscal stimulus is working, as well as those who argue that enough has been provided. An index compiled by UBS AG economists to show when economic data is stronger than markets expect logged its biggest jump last month since August.

Signs of Recovery

Among what economists call the possible “green shoots” of recovery: In the U.S., sales of new homes rose unexpectedly in February by 4.7 percent, and factory inventories are falling. The rate of contraction in European manufacturing and services industries is slowing. New bank lending quadrupled in China in February and vehicle sales increased 25 percent, while Japanese companies including automaker Nissan Motor Co. say they will bolster production in coming months. A new report today showed U.K. house prices surprisingly advanced for the first time since October 2007.

“Our bet is that the global economy is poised for significant improvement,” said David Hensley, JPMorgan Chase & Co.’s New York-based director of global economic coordination.

Investors may already be tuning in. The S&P 500 gained 8.5 percent last month; according to data compiled by the National Bureau of Economic Research and Bloomberg, the index began rising on average five months before recessions ended in 1975, 1982 and 1991.

“You’re seeing encouraging signs of improvement in our markets; we want to reinforce that,” U.S. Treasury Secretary Timothy Geithner said yesterday in an interview.

‘Still in Danger’

Even so, bad news still pervades. Data released yesterday showed that Japanese business confidence plunged to a record low, Chinese manufacturing is shrinking and German retail sales unexpectedly fell. Companies in the U.S. cut an estimated 742,000 workers in March, the most since records began in 2001, according to ADP Employer Services.

“The global economy is still in danger,” said Stephen King, chief economist at HSBC Holdings Plc. He identifies deflation, falling corporate profits and financial protectionism as the biggest threats. As for financial institutions, Deutsche Bank AG Chief Risk Officer Hugo Banziger said March 30 that the credit crisis is “far from over” and IMF Managing Director Dominique Strauss-Kahn says that recovery depends on bank balance sheets being unclogged of tainted securities.

For the G-20 leaders, who already face declining popularity at home, the biggest concern may be slumping payrolls, as companies from French automaker Renault SA to computer-services provider International Business Machines Corp. ax jobs. Growing job losses could snuff-out any nascent recovery by decimating consumer spending.

Unemployment Rising

In predicting the world economy will contract 2.7 percent this year, the Organization for Economic Cooperation and Development said two days ago that average unemployment in the 30 richest nations will top 10 percent next year.

A report this week already showed that job losses in Japan for February hit a three-year high of 4.4 percent. Unemployment in Europe jumped more than expected to 8.5 percent, the highest since May 2006, data showed yesterday. The U.S. rate for March probably leapt to 8.5 percent from 8.1 percent in February, according to the median estimate of analysts surveyed by Bloomberg News.

“There may eventually be light at the end of the tunnel,” said Nouriel Roubini, the New York University professor who predicted the crisis. Still “the economic recovery will be so weak that it will still feel like a recession.”

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Written by Editors

2 April 2009 at 6:43 am

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