--- by VICTORIA MAIN ---
GENOA, Italy (AFX) - G8 leaders aim to put a brave face on the outlook for the world economy during their three-day meeting here from Friday which looks set to have more of an economic focus than past summits, analysts said.
"I think they will talk up the US-led recovery in the second half of the year," Standard Chartered economist Julian Jessop said. "I think that has to be the key story at this summit. We know that in a sense already from the meeting of G7 finance ministers in Rome two weeks ago," he said.
However, analysts said that, for all the leaders' intentions of delivering an upbeat economic message, discord could easily arise over who is responsible for the current slowdown and how it should be resolved.
"There is a good chance that at least one American official at one point will say something he shouldn't, but that's not going to get any positive response from the Europeans," Jessop said.
Commerzbank economists agreed: "One possible risk is anything that politicians say on the fringe of the summit could give rise to speculation that governments do not agree on the best way to tackle the current weakness of the world economy."
Analysts said any such wrangling could send financial markets into turmoil, something they said would be ill-advised given the current uncertainty over Argentina and Turkey.
Commerzbank economists said in a research note: "Recriminations between politicians over who is responsible for the recent problems, or conflict over the course of future economic policy have, in the past, led to major uncertainty on the financial markets." Standard Chartered's Jessop agreed: "If you're trying to talk up the global economy, that is not the time to be picking on individual countries. Their overall focus is going to be to present an upbeat message and any spats in the background about does what isn't going to be helpful so they should try to avoid it." National Australia Bank chief economist Steve Hannah too believes the leaders will seek to keep any tension under wraps. "I think they'll try to play down any differences because a public showdown is in nobody's interest," he said.
"If we come away from the G8 summit feeling that the major economies have significant differences in approach to these problems, that will exacerbate the problems individually," he said. "So I'm sure they'll want to say in public that they're all looking at these issues and that everyone's playing their part in trying to move forward," he said.
Analysts said US President George W Bush may in private echo Treasury Secretary Paul O'Neill's call ahead of the G7 finance ministers meeting in Rome for the EU and Japan to shoulder more responsibility for reviving world economic growth.
"It's a consistent US theme, and when you consider how much the Americans have done in terms of interest rates and fiscal policy, it's not something that they're going to drop just like that," Jessop said, adding that such pressure may only prove to be counter-productive. A UK government official, who did not want to be identified, said he doubted "that this would be a huge focus" and cited Japan's ambitious reform programme as a sign that the US is not alone in taking action to breath life back into the global economy. Analysts noted that, in Rome, O'Neill eventually backed off from a public dispute with French Finance Minister Laurent Fabius following his comment that the EU and Japan should play a "locomotive" role in reviving growth.
They also said the European Central Bank, an autonomous organisation, is no more likely now than it has been all year to cut rates in response to external political pressure . The ECB has cut rates by 25 basis points this year compared with the US Federal Reserve's reduction by 225 basis points.
In Rome, G7 finance ministers agreed on a cautiously optimistic document that their leaders plus Russian President Vladimir Putin are expected to endorse. The finance ministers' working paper said the world economy has slowed more than expected over the past year but conditions are in place for an eventual recovery.
Only UK Chancellor of the Exchequer Gordon Brown struck a slightly more cautious note, warning after the meeting that "we may not yet be at the bottom".
A spokesman for UK Prime Minister Tony Blair said: "We wouldn't want to move away from what the chancellor is saying, but ... our position on the need for economic reform is clear and also the importance of stability across a range of programmes."
The Downing Street spokesman echoed the finance ministers' document: "The global economy has slowed more than expected over the last year, and obviously we may continue to see difficulties for some time but we believe that economic fundamentals remain sound and will provide a solid foundation for renewed expansion." However, analysts said that since the Rome meeting, fears that Argentina will default on its 130 bln usd debt payments and apprehension about the Turkish economy have escalated. "Recent tensions in emerging markets came on top of global economic fragility, but signals coming from the recent G7 finance ministers meeting suggest the outlook of major countries on the global economy is getting more optimistic," Bank of America economists said. In a research note, they asked whether this is wishful thinking or better information than that of the markets.
"Despite the recent bounce-back in the NASDAQ, there is certainly a great deal of scepticism on the possibility of a US recovery as quickly as suggested by O'Neill, although we continue to believe it will materialise by year-end," they said.
Standard Chartered's Jessop said: "There are lots of uncertainties there. I'm not expecting any fireworks at this meeting but people are nervous and there is a lot of talk about what will happen." Hannah, of National Australia Bank, went further, expressing doubts that a positive communique from the G8 leaders will achieve much.
"Putting on a brave face is probably not going to have an awful lot of impact in terms of helping rebuild equity markets and business sentiment, because I think everyone recognises that's more a hope than a reality," he said.
As for currency issues such as the strong dollar, Blair's spokesman said this could be touched on, but only as part of the broader economic debate.
"Obviously when you're looking across the world economy as a whole, it will obviously come up as a subject. In that context, I would expect it to feature," he said. On Tuesday, Japanese Finance Minister Masajuro Shiokawa appeared to rule out any detailed debate on exchange rates at the summit. Overnight, a senior official at the Ministry of Finance said there is no chance that the Bush will discuss the strength of the dollar against the yen and the euro at the summit, although the US president yesterday said a strong dollar may undermine US exports. "Bush said a strong dollar will hurt US exports but also stressed it will help attract foreign capital (into the US). We understand the US government will not take up the dollar issue at the G8," the official said. Hannah agreed that, judging by the lack of discussion on currencies at the finance ministers' meeting, the topic is highly unlikely to feature on the leaders' agenda. "As soon as the market senses that it might be part of an agenda, it comes to all sorts of conclusions. Were they to formally say anything about currencies the chances of being misinterpreted are pretty high," he said. "If you're in a position of economic uncertainty and you're trying to cope with financial meltdown in the equity markets, the last thing you want to do is pour oil on the situation by creating some doubt which wasn't there before," he said. Standard Chartered's Jessop said: "I don't think you're going to get a statement that everyone will sign up to. Even within the US there are conflicting interests on the dollar." By contrast, trade liberalisation is expected to be an agenda item despite expectations of anti-globalisation protests of record proportions. World Trade Organisation director-general Mike Moore will on Friday evening meet with G8 leaders, who are expected to endorse their finance ministers' call for a successful launch of a new round of global trade negotiations at the WTO ministerial meeting in Doha, Qatar in November. The endorsement would follow the comment by European external trade commissioner Pascal Lamy that there is now "a dynamic climate" for the launch of a new trade round. He was speaking this week after meeting US Trade Representative Robert Zoellick in Washington. Blair's spokesman said the launch of a new round is a priority for the UK as it would help developing countries as well as the rest of the world. "It's estimated that a truly liberalising new trade round could boost the world economy by more than 400 bln usd annually. It's been estimated that 100 bln usd of that would go to less developed countries," the spokesman said. National Australia Bank's Hannah cautioned that the leaders may be hardpressed to achieve much on the trade front, however desirable further liberalisation may be. "Clearly in these conditions, the emphasis will be on maintaining free trade because the worst possible thing would be to close off any opportunities to rebuild activity in international exports," he said. "Whether there's formally a move for a new trade round, I don't know, but the attitude towards trade will be to keep all channels of communication open and to try to ensure that artificial barriers aren't put in the way because that would be detrimental to world growth," he said. Jessop agreed that "global trade is always easiest to promote during a boom rather than a slowdown, so it's going to be difficult to get a new round off the ground". Economics aside, the US stance on climate change and missile defence are likely to be amongst the hotter political issues at the summit. Analysts are expecting little progress on either issue, given Bush's statement in an interview with the BBC on Wednesday that he will neither rethink his rejection to the Kyoto protocol limiting greenhouse gas emissions nor his plans for missile defences against rogue nuclear states. Analysts noted that Bush and Japanese Prime Minister Junichiro Koizumi will be making their summit debut. Bush is holding talks with Blair in the UK today as part of his second visit to Europe. For the G8's other newly elected head of state, Italian Prime Minister Silvio Berlusconi, this will be the second summit. During the media-magnate-turned-politician's short stint in power in 1996, he hosted the G8 summit in Naples. Analysts noted that the centre-right leader is anxious to forge ties with Blair and sees himself as a potential key to more harmonious EU relations with the US. The summit is taking place amid strict security controls after bomb attacks targeted businesses including a television company owned by Berlusconi. One person suffered minor burns when a bomb exploded at the TG4 news station of Mediaset SpA after an employee opened a bag containing a video cassette. A suspect package was also received at Italian clothing maker Benetton's headquarters in the northern town of Ponzano, and handed over to police.