The crisis in the US housing market will continue to hamper global economic growth but a recession is not likely this year, the Group of Seven (G7) said today.
After finance minister and central bank chiefs met in Tokyo, they issued a communique warning of "downside risks" for economies.
These included a further deterioration in US residential markets which has led to tighter credit conditions; continuing high oil and commodity prices and higher inflation in some countries.
"In all our economies, to varying degrees, growth is expected to slow somewhat in the short term, reflecting wider global economic and financial developments," the communique said.
Debt-laden banks have reined in lending as their losses, primarily caused by offering too many risky home loans, topped $100 billion. The ensuing fall off in economic activity has created a serious danger of slower consumer spending and job cuts as businesses ride out the storm.
The G7 said banks must fully disclose their losses and shore up their balance sheets to help restore the normal functioning of markets.
"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 G7 communique said.
They reaffirmed that currency levels should reflect economic fundamentals, and that excess volatility was undesirable.
The statement was almost identical to the previous one in October, except the G7 said it would "encourage" the appreciation of the yuan against other currencies.
"We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate," the G7 said.
Economic fundamentals remain sound despite the risk, the communique added.