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G20 summit dilemma: Stimulate economic growth or rein in deficits?

The chief question at this weekend's G20 summit will be how to keep the world economy growing. The Europeans are cutting government spending, ignoring President Obama's call for more stimulus.

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However, Jay Bryson, an international economist at Wells Fargo Securities, says he doubts it will drive the country into a recession. In a report issued Thursday, he notes that other Conservatives in the past (notably Margaret Thatcher) have cut the deficit and then watched the economy grow.

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Behind Mr. Obama’s request for other countries to hit the gas pedal once more are concerns that the global economy may shrink.

Aside from less fiscal stimulus by other European nations, the Chinese government is trying to deflate a real estate bubble. “The big fear is that the government’s effort to bring real estate prices down to more realistic levels could result in a hard landing of the Chinese economy,” writes Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Mass.

At the same time, some parts of the US economy are beginning to wobble. The US housing market is contracting again now that tax benefits for first-time home buyers have expired, consumers are still being careful about their spending, and the financial markets are jittery.

However, as Mr. Kirton notes, the global economic picture is not completely negative. The economies of Brazil and India are booming. “They could offset the sluggish performance from one or two countries,” suggests Kirton.

Neither is the US picture all negative.

US economy 'not in free fall'

“At this point, the base case still sees continued growth,” says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. “It’s just that the pace is a little lower than we thought a few months ago and the risks are more to the downside. The good news is that we are not in free fall.”

Nevertheless, the risk of a global double-dip recession has risen slightly from 15 percent to 20 percent, estimates Mr. Behravesh, who assumes the euro crisis does not become worse and the Chinese economy has a soft landing.

Behind the shrinking European budgets is concern that the euro will continue to fall, as the currency did when Greece was unable to borrow more money. The falling euro could present a risk to standards of living.

The problem of global debt is something that will not be resolved at one G20 summit. World debt, both public and private, now amounts to $222.5 trillion, equal to 362 percent of global GDP, writes David Rosenberg, an economist at Gluskin Sheff, a Toronto wealth management firm.

“The bottom line is that all levels of society, and across most countries in the industrialized world, have far too much debt and far too much debt-servicing costs in relation to income,” he writes in a recent report on the company’s website.