The world cannot be complacent about economic recovery and will need to keep emergency stimulus packages in place well into next year, British Prime Minister Gordon Brown said on Saturday.
Addressing G20 finance ministers and central bankers meeting in London, Brown noted the improvement in the outlook since the height of the banking crisis last year but said more work was needed to ensure an enduring recovery from the worst recession since World War Two.
The stakes are simply too high to get these judgments wrong, so to decide now that it is time to start withdrawing and reversing the exceptional measures we have taken would, in my judgment, be a serious mistake, he said.
With more than half of the total five trillion (dollar) fiscal expansion yet to start, I believe the prudent course is for G20 countries to deliver these fiscal plans and the stimulus packages that have been put in place and make sure that they are implemented in full both this year and the next.
While policymakers appear agreed that economic life-support packages need to remain in place, divisions have appeared over the best way to fix the banking system and ensure no repeat of the credit crisis that plunged the world into recession.
The International Monetary Fund now forecasts the world economy to shrink 1.3 percent in 2009, a shade less than its April forecast of a 1.4 percent contraction, and grow 2.9 percent in 2010, revised up from 2.5 percent previously.
Policymakers remain cautious about declaring victory when unemployment is expected to go on rising and the financial system remains fragile after a two-year crisis that toppled some of the world's best known banks.
Brown said the G20 group of leading and emerging nations had to think not only about the immediate future but also about how to make the world economy safer for the long-term.
Making the recovery sustainable does mean, in my view, avoiding unsustainable imbalances between countries, he said.
It makes sense for countries with large current account deficits to boost exports. It makes sense also for countries with large current account surpluses to increase the demand for goods and services from other countries.
Saturday's meeting will lay the framework for a leaders' summit in the U.S. city of Pittsburgh later this month.
G7 sources have told Reuters that the G20's communique, due on Saturday, will likely maintain the pledge to keep policy accommodative for as long as was needed.
Fixing the banking system is proving more divisive.
U.S. Treasury Secretary Timothy Geithner has called for strengthened bank capital requirements aimed at curbing some of the risky lending practices blamed for the crisis.
But French finance minister Christine Lagarde said on Friday she could not see the point. A G7 source told Reuters that Germany was also opposed to the idea.
Both European nations also want to see tight restrictions on bankers' pay to curb excesses which encouraged them to run riot with risk.
French President Nicolas Sarkozy has even called for a global tax but Britain and the United States, with their powerful banking industries, have balked at that idea.
Still, ministers are expected to agree some codes at this meeting on the structure of remuneration at financial institutions, many of which have had to be rescued with billions of dollars of public money.
Pay and bonuses cannot reward failure or encourage risk taking. It is offensive to the public whose taxpayers' money in different ways has helped many banks from collapsing and is now underpinning their recovery, Brown said.
(Writing by Sumeet Desai; editing by Keith Weir)