Policymakers try to temper 'green shoots' talk

Top policymakers are striving to temper optimism the global economy has turned a corner, which has propelled world stocks on a six-week climb.

Trillions of dollars committed to stimulus packages are starting to work but governments may have to do more to pull the world economy out of its worst recession in eight decades, the head of the the Organisation for Economic Cooperation and Development (OECD) said on Monday.

United States President Barack Obama warned of more pain ahead, European Central Bank Jean-Claude Trichet said it was dangerous to read too much into some recent data suggesting signs of life in major economies and Bank of Japan Governor Masaaki Shirakawa said financial conditions in his country remained severe.

“The number of companies that say funding and the lending attitude of financial institutions are severe is increasing. Against this backdrop, Japan’s economy is deteriorating substantially,” Shirakawa told an annual gathering of Japanese trust banks.

Angel Gurria, secretary-general of the OECD told Reuters the world economy would not bottom out until next year and would probably only start growing again towards the end of 2010.

Speaking on the sidelines of a forum in Beijing, Gurria said China’s “very powerful, very strong” stimulus was starting to have an impact and noted some early signs of Washington’s efforts to stabilise the economy bearing fruit.

“They are starting to see a few positive signals,” he said, but added that this year would be grim, with 30 developed nations suffering a combined contraction of 4,3%.

A string of US officials have voiced confidence in recent days that the world’s economy was turning the corner but Obama said the economy remained under stress.

“We’re not out of the woods. This is still a difficult time for the economy.
Credit is still contracted,” Obama said on Sunday while attending the Fifth Summit of the Americas in Port of Spain, Trinidad and Tobago.

Trichet struck a similar note, playing down recent data that raised hopes the global economy may have already bottomed.

“With respect to 2009, let’s be prepared for having a very difficult year,” Trichet told Japanese newspaper Mainichi.

“In the course of the year, you have ups and downs: a mixture of better indicators and worse ones. Therefore, I would not overemphasise whatever we are observing.”

Green shoots
Cautious optimism about corporate earnings and data suggesting the free-fall in global trade and economic activity was slowing, has spurred talk of “green shoots” of recovery.

The latest of those signs came on Monday in a survey showing capital spending by US firms improving, while the pace of lay-offs was slowing slightly.

Bets that the US and world economy reached a low point in the final quarter of 2008 and the first quarter of this year have buoyed world stocks by nearly a third since early March.

Even banking stocks, which have been a no-go sector for long-term investors—have more doubled since early March, leading many to think recovery is on the way. Others hold to the view that this is just a rally within a bear market.

Asian stocks held near a six-month high struck last week on Monday. European shares edged down, with banks declining ahead of results from Bank of America later.

IBM also releases first quarter results.

“If we are to see a sustained bout of buying, we need to see consistent positive economic newsflow, which simply can’t be guaranteed,” said Chris Hossain, senior sales manager at ODL Securities.

“Having endured 18 months of pain, it will take more than some okay banking numbers to get the masses to return to the markets.”

The OECD’s Gurria said the jury was still out on whether stimulus measures adopted so far by Washington, Beijing and many other governments around the world were sufficient.

“We’ll have to see. But we have to be ready that if they’re not, we just go ahead and make extra efforts,” he said.

The International Monetary Fund (IMF), which starts its spring meeting in Washington on Saturday, is expected to renew its plea to keep the fiscal taps wide open well into 2010.

IMF Managing Director Dominique Strauss-Kahn was quoted on Sunday as saying the IMF would cut its global economic forecasts in the coming week and that he expected a recovery to start in the first half of next year.

In its most recent forecast, the IMF said the world economy would shrink in 2009 by between 0,5% and 1,0%, the largest contraction since the Great Depression.

Obama agrees with the IMF on the need for more action and Beijing has not ruled out topping up its $585-billion stimulus.

But Europeans are more reluctant to commit themselves to more spending. “I would say don’t pile up new decisions, but execute what has already been decided,” Trichet said.—Reuters

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