Time for the Group of Seven nations to pull together again

Once upon a time the Group of Seven countries ruled the world. The G7's economic policies had power and influence and their leadership was well respected by the markets. What the combined might of the US, Japan, Germany, France, Italy, Canada and Britain generally wanted, they usually got.

This is no longer the case. Since the peak of their powers in the 1980s and 1990s, the G7's influence has slowly waned. Multilateralism has been on the back foot for years, especially in the wake of the global financial crisis. International bodies like the International Monetary Fund, World Bank and Organisation for Economic Cooperation and Development have lost considerable weight in coordinating management of the global economy.

This needs to change fast. Today world growth is faltering, financial markets are in disarray and global policymakers are pulling in different directions. It is leaving consumers, businesses and markets confused about the future. World trade growth has sunk 10 per cent from a year ago and global demand is shaky.

The recent market turmoil in China is the latest casualty. Concern about a possible rate rise by the US Federal Reserve has been the last straw for many investors already afraid about the loss of momentum in China's economy. The threat of higher US rates stoking up fears about a global hard landing has been bad news for China's exporters.

But it is not only the spectre of higher rates looming in the US - and in Britain - that is spooking investors. There is a real risk of a double whammy, as both countries are undergoing sharp fiscal contractions. The US budget deficit has declined to less than a third of its 2009 peak, while the British government aims to wipe out its fiscal deficit in the next five years.

Even the euro zone is seeing the positive effects of quantitative easing and zero interest rates being neutralised by the impact of deep budget cuts from governments under pressure to fix ailing public sector finances. Fiscal austerity is now posing a major drag on global recovery prospects.

The IMF has warned against austerity policies being too widely adopted but there is nothing it can do to stop the trend. The IMF wants to see affluent countries like Germany show much more commitment to help global reflation efforts. But it is only a hope, not a reality.