The crumbling US housing market has wounded the world economy, and conditions may worsen as debt-laden banks clamp down on credit, finance leaders from the world’s top industrialised nations said today. While the US economy is likely to escape a 2008 recession and economic fundamentals remained “solid”, the Group of Seven (G7) leaders said far more work is needed to restore markets to good working order and safeguard global growth.“The current financial turmoil is serious and persisting,” US treasury secretary Henry Paulson said. “As the financial markets recover from this period of stress, as of course they will, we should expect continued volatility as risk is repriced.” Caution pervaded their reassurances that the US and the rest of the world should skirt a downturn. “There is a climate of much greater pessimism and worry than in October,” said Italian economy minister Tommaso Padoa-Schiop-pa, referring to the Group’s previous meeting. Indeed, where October’s G7 communique spoke of a global economy in its fifth year of “robust growth”, today’s version described a “more challenging and uncertain environment”. The finance ministers and central bankers used the statement to diagnose the risks to global growth — a deteriorating US housing market, tightening credit conditions and protracted financial market upheavals. Treatment was left for each country to take fiscal and monetary measures appropriate to their needs.Fixing the deeper issues, which stemmed from excessive credit risk, was postponed at least until April. On this front they showed solidarity. “The doctors in charge at the moment are clearly closing the ranks and that’s good,” said France’s economy minister Christine Lagarde. The G7 pointed to serious risks from the US property market slump and tightening of credit conditions, which has slowed the flow of money to consumers and companies that drive the world economy. Banks have curbed lending as their losses, tied primarily to souring US home loans, have risen above $100 billion. The losses may hit $400 billion, said German finance minister Peer Steinbrueck. That may trigger a vicious cycle as consumer spending slows, prompting businesses to retrench and cut jobs.
