Trichet Says World Economy Shows Signs of Stabilizing (Update1)

European Central Bank President Jean-Claude Trichet, who chaired a meeting of central bankers today, said the global economy is showing signs of emerging from its worst recession in more than 60 years.

Latest indicators have been better than anticipated and stabilization is “something which seems to be confirmed at the global level,” Trichet said at a press conference at the Bank for International Settlements in Basel, Switzerland. “It’s not excluded that we would have a bumpy road ahead and of course alertness remains of the essence,” he said.

Central bankers have cut borrowing costs to record lows and injected billions into the financial system after the U.S. housing slump triggered the collapse of Lehman Brothers Holdings Inc a year ago, throwing the global economy into its worst slump since the Great Depression. Governments are also trying to kick- start growth with stimulus packages.

The Organization for Economic Cooperation and Development said on Sept. 3 that the combined economy of the Group of Seven nations will shrink 3.7 percent this year, less than the 4.1 percent contraction it projected in June. The U.S., Japan, Germany and France will all show growth in the current quarter while Canada and the U.K. will continue to shrink, the Paris- based group forecast.

Free Fall Over

“A number of projections had been slightly revised up, confirming that we’re probably, in a large part of the economy, out of the period of free fall,” Trichet said. Still, “we have to remain prudent and cautious.”

Trichet met in Basel with his counterparts from the world’s largest central banks including Bank of Japan Governor Masaaki Shirakawa and China’s central bank governor, Zhou Xiaochuan.

While some policy makers have stressed the need to withdraw emergency measures as soon as the economy improves in order to prevent inflation, the Federal Reserve, the Bank of England, the Bank of Japan and ECB are still in the process of implementing asset-purchase programs in a bid to encourage lending. The ECB on Sept. 3 kept its key rate at a record low of 1 percent after loaning banks as much money as they wanted for 12 months and starting to purchase covered bonds.

Trichet said there’s “a great unity of purpose” among central bankers to deliver price stability. “This unity of purpose doesn’t mean that we do the same because we’re in different situations,” he said.

‘Lessons’

Central banks and governments around the world are seeking tougher regulation after excessive risk-taking by financial institutions sparked $1.61 trillion in losses and writedowns and led to taxpayer-funded bailouts.

The Basel Committee on Banking Supervision yesterday agreed lenders should raise the quality of their capital by including more stock. Financial firms will also have to introduce a leverage ratio and devise ways to boost reserves when the economy is robust, the panel said.

Central banks and governments must “draw all the lessons from the past” in order to ensure that new bubbles aren’t created and “abnormal” risk-taking doesn’t re-emerge, Trichet said.

The Global Economy Meeting is held every two months under the auspices of the BIS, the central bank of the world’s central banks.

By Simone Meier and Christian Vits