G-7 to Seek Remedies to Ailing Economies

Finance ministers from the world’s most prosperous nations will gather in Rome on Saturday, hoping for a brighter economic future but still battling a persistent global slowdown.

U.S. Treasury Secretary Paul O’Neill and his counterparts from the other Group of Seven industrial nations--Britain, Canada, France, Germany, Italy and Japan--face a potentially grimmer situation than when they last met 10 weeks ago in Washington.

Since then, the United States has acknowledged that its economy, the world’s richest, barely edged ahead at a 1.2% rate in the first quarter of the year after a 1% rate of growth in last year’s fourth quarter. And economists think growth may have slowed further or stalled out completely in the second quarter just ended.

That probably squelches hope for a quick, “V-shaped” U.S. rebound, especially with Europe mirroring the American decline and Japan still in the doldrums. It leaves finance ministers to wrestle with sensitive issues of how to stimulate growth, and which region has the greatest responsibility for doing so.

“The U.S. economy is flirting with recession, and probably is in one now, said economist Allen Sinai of Decision Economics Inc. in Boston. “Japan is in a recession again. [Britain] and euro zone economies are sliding.”

Most of the growth-sheltering policy levers already have been pulled, after aggressive monetary easing by the Federal Reserve and tax cuts in the United States and a modest interest-rate cut by the European Central Bank.

Financial markets will be alert for hints of fresh action to tame a rampant U.S. dollar, after intervention to aid the beleaguered euro on the eve of a G-7 summit in Prague last September. But the Bush administration has repeatedly said it does not favor tampering with the currency’s value.

Finance ministers, who meet this time without central bank governors, probably will stick with their mantra that although growth has slowed, economic fundamentals still are strong.

That was the line used in their last communique, issued April 28, but no such formal summary of their meeting will be issued this time. Political leaders from the G-7, including President Bush, will meet July 20-21 in Genoa, Italy, to consider the finance ministers’ findings, and a communique will follow that meeting.

The finance ministers’ job will be to put a good face on current conditions that remain queasy at best.

Recent data have shown what may be tottering baby-steps toward a U.S. recovery, and although the positive signs are tentative, they are forward-looking and carry some promise for a second-half improvement.

“There is some hope that the U.S. economy is starting to turn around,” said economist Douglas Lee of Economics from Washington. “It’s not overly convincing, but at least it’s moderately encouraging.”

One of the hardest-hit sectors of the U.S. economy--manufacturing--performed more strongly in June, according to the National Assn. of Purchasing Management. NAPM said this week that its monthly index of activity rose to 44.7 in June from 42.1 in May for its best reading of the year.

In addition, six straight U.S. interest-rate decreases by the Federal Reserve and the passage into law of the Bush administration’s tax cuts stand to give consumer spending power some punch in the second half of the year.

“These are sound reasons to be able to say that the United States should be stronger during the second half,” Lee said. “Unfortunately, there aren’t those same good reasons for hope in Europe and Japan.”