G7 leaders hint at rate cuts as US consumer confidence hits 10-year low

Western leaders pledged yesterday to intervene to boost world economic growth if the end of the war in Iraq fails to spur a marked rebound.

The promise – a veiled reference to further cuts in interest rates and taxes– will be seen as an attempt to reassure the increasingly volatile financial markets. The Financial Stability Forum, which includes finance officials from the Group of Seven nations, said the world faced "many downside risks".

Andrew Crockett, its chairman, said the current conflict in Iraq was one of the largest threats to the economic recovery. "Nevertheless the central scenario remains that once uncertainties are removed, there will be a gradual pick-up in economic activity," he said. "Should that central scenario not turn out to be the case, they stand ready to take the necessary action."

The FSF said it was too soon to assess the impact the Iraq war would have on the world's economy. "Economic prospects after the war depend on consumer and investor confidence," Mr Crockett said.

His comments came as confidence among American consumers fell this month to a 10-year low. French consumer spending, meanwhile, fell 0.5 per cent in February, the largest drop since November. The US Conference Board said its consumer confidence index fell to 62.5 in March. It was the fourth successive monthly drop and the lowest level since late 1993.

The cut-off date for the survey was 18 March, the day before the US began its attack on Iraq, which meant the fall mainly reflected uncertainty caused by pre-war tensions.

Alan Ruskin, a director of 4CAST in New York, said: "Future developments in confidence will clearly depend on future developments in Iraq, which few can now confidently predict."

Stock markets initially plunged further into negative territory but mounted a firm recovery during the afternoon. Analysts put the turnaround down to a toughly worded address by US President George Bush.

He said that coalition forces were on a "steady advance" and would "prevail" in ousting the Iraqi leader Saddam Hussein.

On Wall Street, the Dow Jones was up 95 points in early afternoon trade while the Nasdaq was ahead 25 points. In London the FTSE 100 closed up 18.7 points or 0.5 per cent at 3762.0.

However, traders in the oil and gold markets took a different view, pushing prices up. In London, Brent crude rose 49 cents to $26.58 a barrel, after surging to $26.92 earlier.

Gold and bond prices traded higher for a second day. Gold and bonds tend to rise in uncertain economic times while there are fears that a prolonged war will lead to a shortage of oil supplies.