Early signs of recovery hang in balance

Kevin Carmichael,  Globe and Mail Update

The leaders of more than a dozen of the world's most important economies convene this week for what could be their most critical discussion yet on the financial crisis. To understand why, consider James Keirstead, who makes hot tubs in Thorsby, Alta.

Orders for Mr. Keirstead's Arctic Spas tubs are up after an “extremely weak” first quarter. However, Mr. Keirstead isn't confident the resurgent demand will last.

“Some fundamentals just aren't there,” said Mr. Keirstead, co-owner of Blue Falls Manufacturing Ltd. “I feel we aren't looking at a V, more of a W,” he added, referring to the trajectory the rebound could take. “We could see some problems this winter.”

A W-shaped recovery, which implies slipping back into recession, is the biggest risk facing Prime Minister Stephen Harper, Chinese President Hu Jintao and their counterparts in the Group of 20 when they meet Thursday and Friday in Pittsburgh.

The G20 has become the central brigade for fighting the crisis since its leaders met for the first time in November.

With their minds focused by the prospect of economic catastrophe, presidents and prime ministers from countries as diverse as Saudi Arabia and France came together in a remarkable show of unity that produced $2-trillion (U.S.) in stimulus spending, a broad plan to restore confidence in banks by overhauling regulation, and a pledge to refrain from harmful trade policies.

But more recently, as indicators show the world economy is likely growing again, the all-for-one spirit forged amidst a financial panic is showing signs of strain.

European leaders and U.S. President Barack Obama appear destined to clash over regulating bankers' pay; a report led by the World Trade Organization last week noted “slippage” on the pledge to avoid protective trade policies; and Japan's government is discussing the removal of stimulus measures, a move that would defy the G20 consensus that it's too soon to take the world economy off life support.

Even if, as the skeptics say, these G20 summits are mostly theatre, leaders so far have pulled off a convincing performance that has helped stabilize the financial system.

But to finish the job, they must show they are serious about turning broad commitments into real policy, or risk watching confidence recede, economists and academics say.

“As a crisis committee, can it signal that this is about more than promises?” said Andrew Cooper, a distinguished fellow at the Waterloo, Ont.-based Centre for International Governance Innovation. “Now is the time for delivery.”

The agenda in Pittsburgh will mirror that of the last summit in London in April. Leaders will debate the appropriate “exit strategies” for extracting government support from the world economy, overhauling financial regulation and giving emerging powers such as Brazil a bigger say in institutions like the International Monetary Fund.

The talks are becoming more difficult because leaders have moved beyond concepts and toward implementation.

Platitudes and pledges don't cost money. That can't be said for the more specific policies that are being discussed now, such as capping the amount of money banks are allowed to pay their top traders – something that French President Nicolas Sarkozy has said must happen in Pittsburgh to keep him at the table.

Some of the leaders appear to sense the need to maintain unity and to make their promises about a new global economic order more concrete.

The Obama administration, while still against hard limits on bankers' pay, agrees that “properly designed” compensation practices are important to ensure a sound financial system, Lawrence Summers, the White House's chief economic adviser, said on Friday.

“It is very important that we get concrete results that go well beyond what was agreed in London,” German Chancellor Angela Merkel said in Berlin.

There's some worry that spats over bankers' pay and similar issues are distracting the G20 leaders from the mission that brought them together in the first place.

“We know of no economy that has been saved by a regulatory reform,” Carl Weinberg, chief economist at Valhalla, N.Y.-based High Frequency Economics, said in a note to the firm's clients.

Mr. Weinberg is critical of the focus on exit strategies, saying the economy remains too weak for such talk.

Still, some investors worry the debts that governments have run up fighting the crisis, combined with the easy money central banks have flushed into the economy, have set the stage for a burst of inflation and higher taxes.

These investors – along with opposition politicians and some voters – are putting pressure on the G20 leaders to set a course back to the way things were.

If Mr. Keirstead's experience is reflective of the current economy, the G20 might want to heed Mr. Weinberg.

Blue Falls Manufacturing has fired 120 people and Mr. Keirstead says he has no plans to bring them back.

The company is on pace to sell about 7,000 spas this year, down from 10,000 before the recession. Instead of building inventory, Mr. Keirstead is filling orders as they come.

“It's coming, but it's not coming that well,” Mr. Keirstead said. “I don't know how soon we'll truly get back to previous volumes.”