World leaders and many economists are acknowledging that the climb out of the Great Recession will be longer and shakier than expected, possibly requiring infusions of government cash well into next year.
Prime Minister Stephen Harper and the other the Group of Eight leaders meeting this week in Italy agreed, at least on the face of it, that the global economy is too unstable to begin rolling back massive stimulus plans in the near future, according to a draft of the statement on the world economy circulating at the annual G8 summit in L'Aquila, Italy.
However, the united front in the statement, hewing to G8 convention, masked clear differences among the leaders on the best path forward as views conflict about the severity of the recession and the merits of massive, budget-busting spending.
Russia and Britain were pessimistic on the economic recovery and appeared to leave the door open to more stimulus spending. Russia said it's too early to declare that the financial crisis has crossed its worst point.
"There is no evidence that the tendencies toward recovery have taken on a stable and irreversible character," said Andrey Bokarev, a financial delegate on Russian President Dmitry Medvedev's team.
British Prime Minister Gordon Brown said the world still faces severe economic dangers. In an interview in London on Tuesday, the day before the start of three-day G8 summit, he said the global economy faces a "second wakeup call" as growth proves elusive.
U.S. President Barack Obama seemed open to further stimulus spending, but said loading up on more debt to kick-start the economy is "potentially counterproductive."
Canada took the middle ground. Speaking Wednesday night at the G8 centre outside rubble-strewn L'Aquila, the central Italian city devastated by an earthquake in April, Mr. Harper urged patience. "The priority right now has to be to make sure the stimulus money [already announced]is actually delivered before we commit to additional actions," he said.
The Harper government has announced it will push out $50-billion in stimulus spending over two years.
A G8 statement on the economy released Wednesday night reflected the uncertainty about recovery after the worst downturn since the Second World War.
"We note some signs of stabilization in our economies," it said. "However, the economic situation remains uncertain and significant risks remain to economic and financial stability."
The latest forecast from the International Monetary Fund had a similar view. It said the upturn will be "sluggish" even as it slightly upgraded its growth estimate for 2010 to 2.5 per cent from 1.9 per cent.
But things will get slightly worse before they get better, the IMF said. Its new forecast for 2009 is for 1.4 per cent contraction, against 1.3 per cent previously.
Canada's economy will grow in 2010 by 1.6 per cent, somewhat better than the 1.2 per cent forecast three months ago, as commodity prices rebound. However, it remains in recession this year.
The tone of the G8 meetings Wednesday was more downbeat than last month's meeting of the G8 finance ministers in Lecce, Italy. At that point, politicians, economists and traders were talking about "green shoots," the signs that the economy was poised for potentially rapid recovery.
The finance ministers agreed then to develop "exit strategies" to wind down their stimulus spending to prevent inflation.
Since then, debate has swirled about how and when to do it. Mr. Blanchard said the IMF's forecasts suggest that is premature.
"It may well be that if the recovery turns out to be very weak, weaker than we expect, governments may have to continue fiscal stimulus in 2010 and even 2011," Mr. Blanchard told reporters.
The cost of stimulus plans is beginning to alarm many investors and policy makers.
The IMF said bank bailouts and other recession-fighting measures will leave the debt of the most advanced countries at 114 per cent of gross domestic product (GDP) by 2014, more than three times the level of the biggest emerging economies, among them China.
Canada's Parliamentary Budget Office Wednesday released a report confirming that the government will see budget gaps of C$156-billion over the next five years.
IMF officials said countries are right to start thinking about undoing all the bailouts, but for most, it's still too soon to stop.
Mr. Blanchard would not comment directly on whether the Obama administration should consider another stimulus package. But he said consumer demand could "be very weak for longer than we anticipate," in which case government stimulus should continue.
After encouraging economic signs earlier this year, particularly in the United States, the news has been less hopeful. The U.S. jobless rate continued to climb in June, to 9.5 per cent, as the economy shed a larger-than-expected 460,000 jobs.
New York University economist Nouriel Roubini said investors were too quick to predict a global economic recovery, and are pulling back, dragging down markets. He is predicting a double-dip recession after a modest rebound in early 2010.
"The June U.S. employment report has brought back a reality check after the misplaced euphoria of the second quarter," Mr. Roubini said in a report. "Markets had moved up too fast, too soon relative to market fundamentals."
He suggested U.S. unemployment could reach as high as 11 per cent later this year - a post-Second World War record.
"The severity of the recession has dug a huge hole for the economy to climb out of, and recent data are a reminder of how difficult the initial recovery will be," noted economist Ryan Sweet of Moody's Economy.com in West Chester, Pa.
The G8's statement also reinforced a theme that Canada's finance minister, Jim Flaherty, has highlighted for months: Unless the banks are "fixed", allowing them to extend credit to businesses and consumers, there can be no credible recovery.
Economists say the banks' reluctance to lend could prove fatal to the recovery.
"All major central banks appear worried that as credit demand starts to recover, credit supply might be unable to keep up," said Marco Annunziata, the chief economist in London with the Italian bank UniCredit Group.
Some central bankers and economists think the banks have moral responsibility to stimulate the economy because many of them were spared from extinction by massive government support.
While the exit plans are being drafted, it is almost certain that none will be implemented in the near term. "These exit strategies will vary from country to country depending on domestic economic conditions and public finances," the G8 statement said.