Markets looking for unity among G20 leaders

Markets will be hoping for signs of a united front on measures to rescue the global economy and fight the threat of protectionism at the G20 summit.

As the recession rages worldwide, economists warn that the need for global co-ordination and co-operation is vital.

But there are fears there is little the meeting of G20 leaders can achieve, with countries already buckling under the strain of fiscal measures taken so far and a clear stand-off emerging between the UK/US and other major economies.

Experts have said one of the most important outcomes would be for a greater commitment to encourage free-trade and to promote the fight against protectionism, which risks exacerbating the recession.

The US move to introduce tariffs on imported goods in the 1930s deepened the Great Depression and there are concerns that recent indications of protectionism by individual countries could have similar damaging effects in the current economic crisis.

With so much money already pumped in by many Governments, economists believe there is little that will come out from the meeting in terms of pledges for fiscal stimulus or monetary policy measures.

Bank of England Governor Mervyn King made this starkly clear in his recent comments, playing down the chance of any further spending boost to aid the UK economy.

The UK is certainly reaching its limits for fiscal help and sceptics claim we are unlikely to hear anything but a great deal of rhetoric at the summit.

However, it has an important role to play in spreading the message that Governments can and are willing to do more to help, according to economists.

Philip Shaw, chief economist at Investec, said: “The G20 is unlikely to come up with any fresh fiscal policy initiatives.

“The more obvious policy measures have already been debated and to a large extent, put in place.

“But it’s important for the UK and other authorities to say there’s more they can do, and sometimes being seen to be doing something is as important as actually doing something.”

Global action on reform of financial regulation is set to be another hot topic, with reports suggesting a leaked report has shown G20 leaders are already close to striking a deal on tougher new principles.

James Knightley of ING Bank said he believes there may be some commitment to spending from other economies that have not yet used up all their arsenal, although this is not expected to come anywhere near the levels suggested by the International Monetary Fund (IMF).

In its recent submission for the G20 leaders ahead of the meeting, the IMF said 2% of GDP globally was needed to help ease the recession and get banks lending again.

This is looking increasingly optimistic, but there are other measures that can help, said Mr Knightley.

He said outside the G20 Summit, there is also a key meeting taking place in the US on the same day on changes to accounting rules that may be crucial in helping banks.

A controversial “mark to market” rule has forced banks to record billions in writedowns, which has impacted their balance sheet strength and their willingness to lend to one another.

If this is eased, it could be a critical next step in helping free-up the crippling credit squeeze, widely acknowledged as the biggest threat to a swift global economic recovery.