Paulson: Global markets face prolonged turmoil

By Glenn Somerville

TOKYO (Reuters) - Treasury Secretary Henry Paulson said on Saturday the global economy faces a prolonged period of financial market disruption but expressed confidence the United States would not be dragged into recession.

"The current financial turmoil is serious and persisting," Paulson said after meeting fellow finance chiefs from Group of Seven industrial countries.

"As the financial markets recover from this period of stress, as of course they will, we should expect continued volatility as risk is repriced," he added.

Paulson said he expected U.S. economic growth to continue in 2008 but conceded the outlook faced risks that had made a fiscal stimulus package absolutely necessary.

He told a questioner at a news conference later that he believed the U.S. economy would expand this year even if it is at a slower rate. "I believe that we're going to keep growing," he said. "If you're growing, then you're not in recession."

Paulson acknowledged the risks to the U.S. economy -- the largest among G7 countries -- were to the downside.

"The housing correction, high energy prices and capital market turmoil have combined to weigh on near-term growth," Paulson said, adding that he felt the $152 billion fiscal stimulus package that Congress passed just before he flew to Tokyo would help and was vital.

"Given the short-term downside risks, we clearly needed to act," he said. Paulson only arrived in Tokyo in the early hours of Saturday and was scheduled to fly back to Washington on Saturday night, spending only about 18 hours in Japan.

The meeting of the G7 -- the United States, Britain, France, Germany, Canada, Italy and Japan -- took place against a backdrop of rising concern that a crisis that originated last year in U.S. subprime markets was spreading throughout the global economy.

Paulson said one lesson to be taken from it was "the increasing need for frequent communication and close coordination during times of stress" to try to find policy responses to minimize the damage.

He said published reports that the United States was trying to push other countries to follow its example by adopting fiscal stimulus measures were incorrect.

"Every country has a different economic situation and every country needs to focus on their own economic situation," Paulson said.

He said G7 members had discussed the sensitive issue of rising investments by so-called sovereign wealth funds -- many of them in countries like China and the Middle East that have acquired big current account surpluses.

Paulson said while their activities needed monitoring, and possibly a code for behavior, they should not be seen as a reason for pushing protectionist remedies that could slow global trade.

(Reporting by Glenn Somerville and Tamawa Kadoya)