G7 leaders turn pessimistic on global economy

By Brian Love and Gavin Jones

TOKYO (Reuters) - Finance leaders of the world's top industrialized nations put on a show of solidarity on Saturday in the face of an economic slowdown and conceded that things could get even worse because of the crumbling U.S. housing market.

In a communique released after meetings in Tokyo, the Group of Seven said prospects for economic growth had worsened since they last met in October, although fundamentals remained solid and the U.S. economy was likely to escape a recession.

"There was a climate of much greater pessimism and worry than in October," said Italian Economy Minister Tommaso Padoa-Schioppa.

Finance ministers and central bankers from Japan, the United States, Canada, Britain, Germany, Italy and France said that growth in their countries was expected to slow by "varying degrees" in the short term.

They pointed to serious risks from the U.S. property market slump and subsequent tightening of credit conditions, which has slowed the flow of money to the consumers and companies that drive the world's economy.

Debt-laden banks have curbed lending as their losses, tied primarily to souring U.S. home loans, rise above $100 billion. That has raised the specter of a vicious cycle as consumer spending slows, prompting businesses to retrench and cut jobs.

Glenn Maguire, Asia Pacific chief economist with Societe Generale in Hong Kong, noted that the G7 offered little in the way of detail on coordination action to support the economy.

"This economic shock and the economic downturn is largely driven by domestic problems in the U.S. and it really can't be remedied by a globally coordinated action plan," he said.

U.S. Treasury Secretary Henry Paulson said global markets may face a prolonged period of unrest.

"The current financial turmoil is serious and persisting," Paulson said in prepared remarks issued after the meeting.

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

ALL TOGETHER NOW

The G7 leaders urged banks to fully disclose their losses and shore up their balance sheets to help restore the normal functioning of markets. German finance minister Peer Steinbrueck said writeoffs could reach $400 billion.

"Going forward, we will continue to watch developments closely and continue to take appropriate actions, individually and collectively, in order to secure stability and growth in our economies," the communique said.

Pledges to work together to restore the financial system to health contrasted with divisions over fiscal and monetary policy ahead of the G7 gathering.