Bernanke, Trichet See End to Global Slump, Caution on Recovery By Scott Lanman and Simon Kennedy
Aug. 22 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet said the world economy is pulling out of its deepest recession since the 1930s. "Prospects for a return to growth in the near term appear good," while "critical challenges remain," including possible further losses for financial firms, Bernanke said yesterday. Trichet said "green shoots" aren't enough for him to declare the recovery sustainable and that officials "have an enormous amount of work to do." The mixed outlook was one of the main themes struck on the first day of the annual central bankers' symposium in Jackson Hole, Wyoming, hosted by the Kansas City Fed bank. Policy makers from South Africa to Mexico and economists dissected the causes of the financial crisis and debated how to prevent or mitigate the next one. Economic reports this week showed unexpectedly strong signals of a rebound in the U.S., Germany and France. U.S. purchases of previously owned homes climbed 7.2 percent in July to the highest level in almost two years, indicating the housing crisis that crippled the world's largest economy is easing. U.S. stocks gained for a fourth day, with the Standard and Poor's 500 Index rising 1.9 percent in New York to the highest level since October. Benchmark 10-year notes yielded 3.57 percent, up 13 basis points from Aug. 20. Services Expanded Following last week's data showing the euro-area's two largest economies pulled out of a recession in the second quarter, Markit Economics reported yesterday that German services expanded this month for the first time since September. Its gauge for French manufacturing rose to its highest in 15 months. "There is a sense here that things have stabilized since the panic," said John Taylor, a former U.S. Treasury official and now a professor at Stanford University in California, who attended the symposium. "But things still look pretty flat and nobody is saying there is going to be a sharp rebound." After giving welcoming remarks at a dinner the previous evening, Bernanke, 55, opened the formal part of the conference yesterday with a speech defending the Fed's responses to the crisis over the past year and those of counterparts around the world. A "strong and unprecedented international policy response" averted "the imminent collapse of the global financial system," Bernanke said. On the Mend Even with the economy on the mend, Bernanke said "strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit." Recovery "is likely to be relatively slow at first, with unemployment declining only gradually from high levels." Bernanke's note of caution underscored the Fed's decision last week to leave interest rates near zero for an "extended period" and to delay by a month the scheduled end to its $300 billion program to buy U.S. Treasuries. At lunch, Bank of Israel Governor Stanley Fischer told attendees that "despite the encouraging signs of recovery, it is too early to declare the economic crisis over." The former first deputy managing director of the International Monetary Fund also said the global banking system may require "radical restructuring" to avoid future crises. While economists predict the U.S. will return to growth this year, they say the jobless rate is likely to rise beyond 10 percent, restraining consumer spending and casting a cloud over the strength of the recovery. `A Bit Uneasy' Later in the day, Trichet, 66, spoke from the audience during a debate period, saying, "I am a little bit uneasy when I see that because we have some green shoots here and there, we are already saying, `Well, after all, we are close to back to normal.'" "We know that we have an enormous amount of work to do and we should be as active as possible," Trichet said without elaborating on a forecast. Bundesbank President Axel Weber, speaking on CNBC, said at the gathering that it's "too early to say it won't be a bumpy road ahead." Separately, the Organization for Economic Cooperation and Development will next month upgrade its outlook for the economy of its 30 nations, which include the U.S. and Japan, Secretary General Angel Gurria said. The Paris-based group said in June that the combined economy of the world's most-industrialized countries will shrink 4.1 percent this year and grow 0.7 percent in 2010. `Positive Trend' "We're confirming a positive trend but are still cautious," Gurria said in an interview in Jackson Hole. "There are risks that are important." Economists forecast the U.S. economy will expand at a 2.2 percent annual rate in the third quarter, according to the median estimate in an August survey by Bloomberg News. The IMF last month predicted the world economy will grow 2.5 percent in 2010 after contracting 1.4 percent this year. One academic paper presented at the symposium said large financial crises can impair long-term economic growth by increasing government debt and reducing tolerance for risk. "Many systemic banking crises have had lasting negative effects on the level of gross domestic product," Bank for International Settlements economist Stephen Cecchetti said in the paper, written with BIS economists Marion Kohler and Christian Upper. Meredith Whitney, the analyst who predicted that Citigroup Inc. would cut its dividend last year, outlined one key risk to the recovery by predicting the number of U.S. bank failures will quadruple as lenders struggle with bad loans. "There will be over 300 bank closures," Whitney said in an interview with Bloomberg Television in Jackson Hole. "The small-business owner on Main Street continues to see liquidity come away." http://www.bloomberg.com/apps/news?pid=20601087&sid=alxPi3o5avXA
