G7 will warn recovery needs further stimulus

THE SUMMIT of the seven richest industrial nations' leaders will signal this week that a further stimulus is needed to ensure the world economic recovery does not falter.

The summit will ultimately clear the way for lower interest rates across Europe, including Britain. But officials say an early cut in European rates, led by Germany, looks unlikely.

Moreover, some senior Summit officials warn that the promised dollars 60bn ( pounds 32bn) boost to public spending in Japan may do little to lift demand for foreign goods in the Japanese market, a development which should in theory generate economic expansion elsewhere.

The summit is accordingly set to signal that as soon as future stimulative measures prove possible, without endangering the goal of low inflation, they will be taken. 'It will be a framework for future action,' a senior G7 official said.

The one potential surprise is a possible breakthrough on the Uruguay Round of world trade talks, which could provide a much-needed fillip to flagging business confidence.

When leaders of the US, Japan, Germany, France, Italy, Britain, Canada and the European Community meet for their three-day annual summit in Munich on Monday, they will point to measures such as last week's US interest rate cut designed to promote growth. The 3 per cent discount rate is at a 29-year low.

Germany announced proposals to curb its ballooning budget deficit, which may control inflation and help to persuade the Bundesbank to ease interest rates. Japan has meanwhile signalled it is ready to consider a substantial boost to public spending to stimulate domestic demand.

Although the expansion in the industrial world this year is expected to top the 1991 performance, a senior British official said it was 'very weak' for this stage. 'No one is really taking the recovery for granted.'

There are fears in Europe, however, that the latest reduction in US rates could lead to a worrying decline in the dollar, an issue European finance ministers are expected to take up with Nicholas Brady, the US Treasury Secretary. Some officials fear a deepening dollar decline could put pressure on the US Federal Reserve to reverse its long run of interest-rate cuts.

Prospects for lower European interest rates depend on the Bundesbank, which has indicated its opposition to bringing down rates.

G7 officials acknowledge that the politically independent central bank remains deeply concerned about the rapid expansion of German money supply. One senior G7 official said: 'The German budget plan is a necessary but not a sufficient condition for lower German rates.'

'In terms of Europe, I do not expect immediate commitments to reduce interest rates,' a senior British official said. He also ruled out a summit pledge on immediate cuts in rates, lending weight to Whitehall's dismissal of speculation that the Bank of England was poised to cut base rates again last week.

Although officials are playing it down, the summit could lay the groundwork for a political breakthrough on the languishing talks on the General Agreement on Tariffs and Trade. Business leaders believe a resolution of the six-year talks could do more than anything else to initiate a world economic upswing. But mounting protectionist pressures in the US presidential election campaign, and the difficulty that Britain and Germany have experienced in getting France round to agree on liberalising agricultural trade, appear to rule out a formal summit negotiation on Gatt.

This politically delicate backdrop may make it impossible for the summiteers to reveal any progress on Gatt during their talks. 'I wouldn't count on a breakthrough at the summit, but the private discussion will be quite important, more important than the leaders will be able to say publicly,' a senior G7 official said.

(Photograph omitted)