Genoa summit: G8 leaders dismiss fears of global economic slowdown

Forecasting group urges Bank of England to avert full-blown UK recession by bringing down value of pound
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The Independent Online

The world's richest nations yesterday shrugged off fears of a global recession, predicting that the world economy would grow at 3 to 4 per cent this year.

Speaking at the end of the G8's riot-torn summit in Genoa, the German Chancellor Gerhard Schroder said such a rate of growth was "not bad at all", adding that there was no reason to be worried about a recession.

Mr Schroder also said that President George W Bush had told him there were "positive signs" for the American economy in the second half of the year, helping allay fears that a US recession could prompt a wider global downturn.

On the UK front, however, there was a warning yesterday from a respected forecasting group that the Bank of England must intervene on the currency markets to bring down the value of the pound to prevent a recession.

The Ernst & Young ITEM Club, which uses the same economic model as the Treasury, said the economy would grow just 1.8 per cent this year, its worst performance for nine years. Last year it grew by 3.1 per cent. Professor Peter Spencer of Birkbeck College, the club's chief economic adviser, said the weakness of demand had exposed the long-term harmful impact of the pound. "Manufacturing is in recession and this rot will spread if it is not stopped soon," he said.

In its quarterly review, the ITEM Club said it had decided to break with its tradition of not giving policy advice because of the severity of the outlook. The ITEM Club said the UK would be squeezed between the global slowdown in demand and the impact of the strong pound on exporters. It said the Bank, preferably working with the European Central Bank and the US Federal Reserve, should intervene to sell sterling and buy euros.

"Such a move would bring down the value of the pound and dig Britain out of an economic hole allowing growth to resume," said Professor Spencer.

He said dismissed claims that intervention was useless in a world of mobile capital markets, saying "even a modest effect would be worthwhile in the present situation".

Professor Spencer said such a move, which was carried out to boost the euro last September, was needed to offset the impact of the high pound. "Britain has endured high exchange rates for too long. UK manufacturing is already in recession which is spreading to services and it will not be long before this hits consumer confidence. We must not allow our currency to be puffed up to the degree that it puts our whole economy at risk."

The pound was last week hovering at around DM3.22 against the German mark – way above the DM2.95 that it could maintain in the exchange rate mechanism nine years ago.

Last Friday, Sushil Wadhwani, a member of the Monetary Policy Committee, said the pound was overvalued by 10 per cent. A more appropriate exchange rate would be DM2.8 to DM3, he said.

The ITEM Club has become the second leading independent forecaster in four days to criticise the Treasury's economic forecast. Last Thursday the National Institute of Economic and Social Research forecast growth of 2.1 per cent this year and called for immediate cut in interest rates. These compares with the Treasury's forecast range of 2.25 to 2.75 per cent published in its March Budget. A Treasury spokesman said there had been no revision to the forecast since the March Budget. "The overall picture is still looking pretty good," he said.

Chancellor Schroder, reporting back on his bilateral talks in Genoa with President Bush, said: "He assumes there are reasons for rather than optimistic expectations [for the US economy] but that it is not yet as firm as we all would like it."

Speaking after the G8 meeting, the Japanese Prime Minister Junichiro Koizumi, pledged to embark on structural reform to overhaul the country's economy rather than higher public spending, even though it might result in slower growth in the short term. "Some people want fiscal measures because the economy is weak but we have determined to pursue reforms. We will have to accept low growth rates to a certain extent."

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