The global economy may be nearing a turning point although financial markets are still underestimating the potential for a recovery, top central bankers said on Monday.
European Central Bank President Jean-Claude Trichet, who chaired the central bankers' talks at the Bank for International Settlements, said a return of confidence was crucial to getting the economy back on its feet.
We are in a situation where we still observe a slowing down of the economy, he told a news conference, summing up the central bankers' discussions in the Swiss city of Basel.
But there were also some positive elements which investors and financial markets had underestimated, such as the fall in commodity and oil prices, budget stimulus packages, interest rate cuts and governments' commitment not to let important financial institutions fail.
We are identifying a number of elements in the global economy ... that are expansionary, said Trichet, who also chairs the Group of 10 central bankers. We have a number of elements that are suggesting that we are approaching the moment where we would have a pickup.
Trichet noted that international institutions expected an economic contraction this year in industrialized nations and flat growth globally, before a pick-up in 2010. I would not say that the central bankers would depart from this mainstream analysis, he said.
Major central banks have slashed rates to record lows and governments have increased spending as the financial market crisis has extended its reach into emerging markets and confirmed major developed economies, including Japan, the United States and the euro zone, in recession.
EMERGING ECONOMY IMPACT
Trichet said there was no big chance of deflation at a global level but it was important for central banks to keep inflation expectations anchored.
In some parts of the world where inflation was still high, this meant allowing disinflation to continue, while developed nations could guard against the counterproductive impact of a much too low or negative level of inflation.
The ECB slashed its forecasts for euro zone economic growth and inflation last week after cutting rates to a record low of 1.5 percent. The International Monetary Fund has said the world's rich economies are shrinking at a rate not seen since World War Two.
Policymakers from leading developed and developing nations meet in London on April 2 under pressure to co-ordinate and step up their efforts to stave off a slump in the wake of the worst financial crisis in living memory.
Trichet said economies in Latin America, eastern Europe and Asia were all now being touched by the impact of the financial crisis, although there was no one-size-fits-all solution.
Global trade flows were diminished as the economic slowdown took hold and a lack of credit could be a factor, he said, urging countries not to resort of protectionism.
Speaking before the meeting, People's Bank of China Vice Governor Yi Gang said there was a lot of uncertainty about the future of exports, and this would have an impact on his country.
You can see that the whole world's exports (are) slowing down. I'm saying that the phenomenon will definitely be observed in China, he told reporters.
Argentine central bank governor Martin Redrado said massive capital outflows from Latin American and Asian countries into the United States were hurting growth prospects in the region and currency mismatches were hurting eastern Europe.
At the G20 the main concern that Latin America and Asia economies have is precisely this flight to quality, he said. Paradoxically in a flight to quality, capital was moving to Treasury bills issued by the U.S., where the problem originated. Clearly that is hurting financial and growth possibilities (of emerging economies), he said.
Polish National Bank Governor Slawomir Skrzypek said the country's economy was in better shape than many of its neighbors but the zloty was suffering due to speculation and investors' preference for safe-haven assets.
I'm not happy with the zloty because the zloty doesn't reflect fundamentals, he said. Foreign exchange intervention is an instrument of monetary policy which we are ready to use.
(Additional reporting by Natsuko Waki)