Slowdown in France and Germany raises G7 stakes

ALARMING SIGNS of weakness in Europe's two biggest economies have raised the stakes at today's Group of Seven meeting in Bonn. Wim Duisenberg, president of the European Central Bank, will come under fresh pressure to avert the danger of recession by cutting Euroland interest rates.

Figures yesterday showed a shock fall in German gross domestic product at the end of 1998, the first fall in national output for three years. Separately, business confidence in Germany continued to deteriorate in January, the eighth successive month of decline. In addition manufacturing output in France fell sharply in December rather than rebounding as expected.

Analysts said the disappointing news had improved the chance that the ECB would cut rates in March. In the eyes of the financial markets, it is the weakness of the euro since its launch 50 days ago that explains the European Central Bank's reluctance so far to reduce borrowing costs.

"These figures explain Oskar Lafontaine's pressure on the ECB," said Mark Cliffe, European economist at ING Barings. But he added that the high-profile campaign for rate cuts by the German finance minister had probably been counter-productive.

However, today's G7 meeting will be the first time that Mr Duisenberg will have had to face all his critics.

Gordon Brown ,the Chancellor of the Exchequer, will today back calls from US Treasury Secretary Robert Rubin for the Europeans to cut interest rates to boost demand.

Mr Rubin said earlier in the week that the disparities in growth between the United States and its main trading partners was leading to an unsustainable situation.

The Chancellor and the Governor of the Bank of England, Eddie George, will point to the speed with which the UK has cut interest rates.

Treasury officials said yesterday that all countries needed to play their part. "We do want demand-led growth across the world to ensure that the burden of absorbing exports from crisis economies is evenly shared."

Yesterday's figures showed that German GDP fell by 0.4 per cent in the final quarter of 1998, taking GDP growth for the year as a whole to 2.6 per cent from the previous year's 2.3 per cent. A sharp fall in exports, down 3.4 per cent in the quarter, accounted for much of the weakness, but investment and government spending also declined.

The latest index of the business climate in Germany from Ifo, the economic research institute, declined to 91.1 in January from 91.4 in December, while the expectations index fell to 96.1 from 96.5. The continuing fall came as a big disappointment as the closely scrutinised indicator had been expected to stabilise.

In France, manufacturing output fell 0.7 per cent in December after a 0.1 per cent drop in November. The year-on-year growth in production slowed markedly to just 1.2 per cent.

Don Smith, an economist at HSBC Securities, said: "This signals that an underlying deterioration in French industrial activity is now taking hold."

At today's meeting the Chancellor is expected broadly to support proposals from Hans Tietmeyer, the Bundesbank President, for a new liaison committee linking central bank governments which could act as an early warning system to ensure that potential problems in the world economy and financial system are spotted early.

Mr Tietmeyer has stopped short of calling for a new international body and is proposing instead a new forum with a small secretariat, which would co-ordinate the work of existing regulatory bodies and central banks around the world.

The Chancellor is particularly keen that the various codes of practice on transparency and standards of compliance and prudential supervision being drafted in response to the Asian and Russian crises are implemented rapidly.

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