G-7 still shows scant coordination

By Swaha Pattanaik

LONDON (Reuters): The Group of Seven (G7) industrial nations can put a better gloss on global economic prospects after the latest cut in U.S. interest rates but they still show no sign of coordinating policy in response to the downturn that will top the agenda when they meet in Washington next week.

The unexpected rate cut which the U.S. Federal Reserve delivered on Wednesday -- its fourth of the year -- is expected to make it easier for the G7 to contend they are tackling the global slowdown.

But the Fed looks to be doing most of the heavy lifting for the rest of the world and there is no sign of the coordination the G7 showed seven months ago when they banded together in Prague to defend the euro and to cap oil prices.

The prospects of the world economy are even bleaker than they were then but the Prague spirit is nowhere to be seen.

The new administration in Washington is avowedly anti- interventionist and has shown no appetite for acting in concert with its G7 allies.

The European Central Bank (ECB) is stalling on loosening policy and even those central banks who followed the Fed's lead earlier this year are either moving more slowly or, like Japan, have run out of economic elbow room.

"There may be a coordinated slowdown in growth around the world but there is no coordinated policy response to it," said Avinash Persaud, head of global research at State Street.

"Policymakers will be happy that the Fed has cut rates but what we are seeing are individual responses to that slowdown."

The economic chill might have started in the United States but it has quickly spread around the world.

The IMF is next week expected to slash its 2001 U.S. growth forecast to 1.5 percent or lower, less than half the growth rate it had been expecting in September, but also to cut its forecast for world growth to about three percent from 4.2 percent.

The euro zone has proved relatively resilient to the U.S. slowdown but cannot claim full immunity -- only last week the Organization of Economic Cooperation and Development cut its 2001 euro zone growth forecast to 2.7 percent from 3.1 percent.

The ECB has so far resisted calls for it to fall into line with its peers in the United States, Japan, Britain who have already cut rates this year.

Analysts said the gravity of the risks facing the world economy and the timing of the Fed's latest and unexpected move offered the ECB the chance to capitulate and present a rate cut as part of a coordinate policy response.

But with inflation still running above the ECB's self-set ceiling and German central bankers talking tough, financial markets detected no change of heart at the ECB ahead of the G7.

"The Fed is in crisis mode but this is not the case with the ECB which seems to think that if it ain't broke don't fix it," said Mark Cliffe, chief economist at ING Barings.

"This may be far too complacent but it will make it difficult for the G7 to come up with a unified policy response or anything more than a reassurance that they are on the case."

Meanwhile, Japan is expected to have few policy initiatives up its sleeve at the G7 which will come just days after its politicians have picked the country's next leader and rates are already at rock bottom.

Against this backdrop, the G7 is unlikely to hammer out a coordinated policy response to the economic downturn which all the major economic powers should be fretting about, analysts said.

"The G7 will welcome the Fed's move as a significant contribution to improving the economic climate but there needs to be a more equitable distribution of the burden of reflating global demand," said George Magnus, chief economist at UBS Warburg.

"The Fed is acting aggressively but that doesn't get the ECB or Japan off the hook given that Japan and Europe will know all about it if the economic downturn in the U.S. gets more serious."

The United States may not be happy doing all the work but is unlikely to be able to grumble in public given the stance taken by U.S. President George W. Bush's administration since he took office in January.

U.S. Treasury officials have advocated a hands-off approach to financial markets and Bush's top economic adviser, Lawrence Lindsey, has said intervention to support the euro last year had been a mistake.

Even outside the field of finance, the new administration has gone it alone -- most recently by its shock decision to reject the Kyoto accord aimed at cutting emissions of greenhouse gas.

"There will be growing impatience in Washington with the European fence-sitting but the problem is they can hardly criticize them in public," Magnus at UBS Warburg.