Global Finance Chiefs Said to Warn of Growing Economic Risks

U.S. Treasury Secretary Jacob J. Lew
U.S. Treasury Secretary Jacob J. Lew said the global economy continues to underperform, particularly Europe and Japan. Photographer: Krisztian Bocsi/Bloomberg

Group of 20 finance chiefs will warn that risks to the global economy have increased in recent months, an official said, citing the latest draft of a communique due to be released today.

Finance ministers and central bank governors meeting in Cairns, Australia, will acknowledge in the statement that the outlook is uneven among countries, the official from a G-20 nation said yesterday, asking not to be identified because the document hasn’t been made public. G-20 economies today will also commit to taking growth-boosting measures to spur recovery.

“Ambitious goals to increase sustainable growth rates are certainly welcome against the background of sluggish growth and sticky unemployment in some countries,” European Central Bank Governing Council member Jens Weidmann said in an interview yesterday.

The global economic recovery has faltered since a February G-20 meeting in Sydney, as signs that Europe risks slipping into deflation offset more bouyant economies in the U.S. and U.K. and the wealth effects of stock-market gains. In Asia, Japan’s revival is being blunted by a sales tax increase and concerns are mounting that China’s 7.5 percent growth target for 2014 is becoming harder to attain.

Growth Plans

G-20 economies have submitted individual plans to boost gross domestic product by an additional 2 percent over five years, a goal the group committed to in February.

The group will say in their statement that measures proposed so far will boost GDP by 1.8 percent. Members will commit to additional action to meet their target ahead of a summit of G-20 leaders in Brisbane, Australia, in November, the official said.

Even as the group discusses longer-term measures to lift economic output, officials in the U.S. and Canada are pressing for more immediate steps to boost demand.

Some European countries should consider additional fiscal measures to bolster growth, even if they temporarily delay efforts to shrink their budget deficits, Canadian Finance Minister Joe Oliver said in an interview. U.S. Treasury Secretary Jacob J. Lew said the global economy continues to underperform, particularly Europe and Japan.

“More work is needed to achieve faster and more balanced growth, to boost demand especially in surplus countries, and to promote employment,” Lew said Sept. 19.

World Bank President Jim Yong Kim said in Sydney Sept. 19 that the International Monetary Fund and Organization for Economic Cooperation and Development have suggested that all the efforts on the table so far to meet the target add up to “about 1.6 percent growth.”

Sustainable Path

At the February meeting, the group pledged to continue implementing fiscal strategies in a flexible manner, taking into account near-term economic conditions, while putting debt on a sustainable path. They also highlighted the benefits of exchange-rate flexibility.

The statement today will reiterate language on fiscal policy and foreign exchange from previous statements, the official from the G-20 nation said.

The U.S. dollar has climbed as the Federal Reserve edges closer to its first interest-rate increase since 2006, while easing by the European Central Bank and the Bank of Japan are weighing on the yen and euro.

Currency Intervention

Lew renewed a call for member nations to avoid currency intervention in a bid to gain a competitive edge. He told South Korean Finance Minister Choi Kyung Hwan that countries must meet “commitments to move toward market-determined exchange rates.”

Divergent monetary policies “have the risk of increasing uncertainties in global financial markets,” Choi said in an interview yesterday. Volatile foreign-capital flows “could also have an impact on the foreign exchange rates,” he said.

G-20 finance chiefs are considering asking investors in the communique to be vigilant against taking excessive risks, according to another official from a G-20 economy, who asked not to be identified because the talks are private.

Some emerging markets argued against including the warning in the statement due to concern it could cause reactions in the financial markets, the official said.

The Standard & Poor’s 500 Index is in the midst of its longest streak of quarterly gains since 1998, rising last week to a record. The Stoxx Europe 600 Index has advanced in five of the past six weeks.

German Finance Minister Wolfgang Schaeuble told the G-20 meeting yesterday that expansive fiscal and monetary policies could risk creating a bubble in equity and property markets, according to a German delegation official, who briefed reporters on condition of anonymity in line with policy.

Complacent Investors

Investors are becoming complacent about risks in financial markets as loose monetary policy spurs a search for yield, the Financial Stability Board said Sept. 18.

The MSCI World Index of global developed-market equities touched 16.25 times estimated earnings this month, the highest since December 2009, according to data compiled by Bloomberg.

Investors may be taking excessive risks and abruptly change course, particularly with the Fed moving closer to raising interest rates, IMF staff said in a note to G-20 officials this month. Money keeps flowing into stocks and bonds even in markets where growth is weakening or the recovery isn’t clear, raising concerns that investors are underestimating credit risks, according to the report.

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