Markets hold breath as G7 meet

LIKE RABBITS frozen in a car's headlights, the financial markets stood still yesterday as they waited for the outcome of key speeches and meetings later this week.

Deputy finance ministers from the Group of Seven countries are due to finish meeting in Paris today, while Alan Greenspan, the Federal Reserve chairman, will give testimony to a Congressional committee this afternoon.

In London tomorrow the Chancellor of the Exchequer and the Governor of the Bank of England will give their annual Mansion House speeches, expected to set a tough tone on both the fight against inflation and government spending policy in the year ahead.

The yen remained weak against the dollar, briefly passing the 141 level before recovering in later trading. It remained below the 140 level, but deep pessimism about prospects for the Japanese economy was tempered by fear that the G7 would decide to intervene to prop up the flagging currency.

The markets will also be on the alert for any signal from Mr Greenspan about the need for a US interest rate rise. But for the economic crisis in Asia the Fed would almost certainly have already increased borrowing costs.

Larry Summers, the deputy US Treasury Secretary, had no comment yesterday and insisted there would be no statement after the informal G7 meeting. But Hikaru Matsunaga, Japan's finance minister, said: "We have strong worries over excessive yen weakness. We will take decisive measures as needed in co-operation with the G7 nations."

Shares in Tokyo staged a recovery yesterday, with the Nikkei index climbing 235 points to 15,530.17. Big exporters led the rise, with the weak yen expected to boost their performance.

While a US rate rise is widely expected, the uncertainty over the interest rate outlook in the UK increased yesterday with official figures showing that manufacturing had crept out of recession in the three months to April. A surge in energy output, to a record level, took growth in total industrial production even higher.

Although the unexpected rise in April, and upward revisions to earlier figures, did nothing to alter the fact that manufacturing is stagnating, they did take analysts by surprise. While most were confident until last week's shock interest rate rise that the cost of borrowing had reached its peak, few are so sure now.

However, business surveys suggest that the outlook for industry remains bleak. Michael Saunders, UK economist at Salomon Smith Barney, said: "Manufacturing is going to weaken again."

Manufacturing output edged up by 0.1 per cent in April, and its level in March and April was also revised up. Although it remains a fraction lower than a year ago, it has climbed by 0.9 per cent in the latest three months - and therefore technically is no longer in recession.

A 7.1 per cent leap in electricity, gas and water output during April, along with a 3.4 per cent rise in oil and gas extraction, meant total industrial production rose by 1 per cent during the month to a level 1 per cent higher than a year earlier. The energy surge is expected to prove erratic. The Office for National Statistics said the trend in manufacturing was flat while trend growth in total industrial production was 0.5 per cent.

Official figures next week for retail sales and average earnings will be seen as a more important signal about the direction of the next interest rate move. The policy debate both inside and outside the Bank of England hinges on whether the non-manufacturing parts of the economy are slowing down fast enough to keep inflation on target.