G20 plans for stimulus exit

By Ralph Atkins in Frankfurt and Norma Cohen in London

World leaders have set out the first steps toward withdrawing emergency support for the global economy even though they warned that the crisis was not over. On the eve of Friday’s meeting of G20 finance ministers to prepare for a summit on financial regulation later this month, the US, UK, France and Germany called for work to start “on exit strategies to be implemented in a co-ordinated manner as soon as the crisis is over”.

Tim Geithner, US Treasury secretary, said finance ministers should start to spell out how the “very successful policy response” to the economic crisis could be reversed. Speaking at the US Treasury before flying to London to meet his counterparts from the Group of 20 nations, Mr Geithner said these exit strategies were “very important to [the] confidence” of the financial markets. The London meeting will be followed by a summit in Pittsburgh, hosted by President Barack Obama, on September 24-25.

Discussed content

● Bankers’ bonuses
● Bank capital adequacy and liquidity
● Accounting for bank assets and liabilities
● Exiting from massive fiscal and monetary stimulus
● Completion of the international aid package
● Reform of international financial institutions

Jean-Claude Trichet, European Central Bank president, writing in Friday’s Financial Times, has outlined for the first time the principles the ECB would use to unwind the exceptional steps it has taken.

The calls highlight how the policy debate has switched from crisis response to presaging a return to normal conditions.

A recovery in the world’s economy now looks likely to come earlier than had been expected a few months ago, the Organisation for Economic Co-operation and Development said on Thursday. But it warned that a return to normal conditions would be slow and protracted.

The OECD is forecasting that in 2009, the contraction in output among G7 nations will be 3.7 per cent, less severe than the 4.1 per cent decline forecast just a few months ago. The OECD downgraded the outlook for the UK, which will be the only G7 nation not to show growth in any single quarter of 2009.

For 2009, UK gross domestic product is expected to contract at an annualised 4.7 per cent, an even sharper fall in output than the 4.3 per cent decline forecast in June, although the third and fourth quarter outlooks have been revised up marginally.

The UK’s recovery was slower than the global recovery partly because of its heavy specialisation in financial services, said Jorgen Elmeskov, acting head of the OECD’s economics department. The global recovery was being led by the manufacturing sector.

Mr Elmeskov said the UK’s ability to stimulate demand had been constrained compared with other countries.

Mr Trichet, in his FT article, stressed that it was “premature to declare the financial crisis over”. The ECB sees a bumpy road ahead for the eurozone and is wary about global prospects, especially if the US rebound disappoints. The ECB left its main interest rate unchanged at 1 per cent on Thursday.

In a joint letter to European Union countries, Gordon Brown, prime minister, Nicolas Sarkozy, French president, and Angela Merkel, German chancellor, wrote: “While cyclical indicators point to economic stabilisation, the crisis is not over.”