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WASHINGTON–The world economy is in worse shape than expected because of the spreading credit crisis, finance ministers from the major industrial nations have concluded.

"The turmoil in global financial markets remains challenging and more protracted than we had expected," the Group of Seven ministers, including Canada’s Jim Flaherty, said in a statement last night after meeting with their central bankers in the U.S. capital.

They outlined a course of urgent reforms to rebuild confidence in the financial system, including full disclosure of investment risks by banks and other financial houses, improved risk management and the introduction of enhanced accounting standards.

"No G-7 country, including Canada, is immune," Flaherty said.

But he and Bank of Canada governor Mark Carney said Canada is in better shape than other countries during the current crisis.

Canada’s economy remains strong and bank losses on risky investments in Canada are "modest" by international standards, Flaherty said at a news conference.

Flaherty said the primary reform he wants to see is improvement in the operation of credit-rating agencies.

He also said it is vital to set up a common securities regulator in Canada.

Flaherty said he will soon meet with Canada’s banks to discuss improvements in the wake of the problems experienced in the past year on investment markets.

Earlier, Flaherty told reporters the International Monetary Fund is taking an overly dim view of Canada’s economic prospects this year.

"I think the IMF has been relatively pessimistic with respect to Canadian economic performance," he said.

This week the IMF, a Washington-based financial organization, slashed its Canadian economic growth prediction for 2008 to 1.3 per cent, down from its January projection of 1.8 per cent.

Even if the IMF is right, Flaherty added, the slump in Canada will not be deep enough to push the federal government back into a budget deficit.

"Even on their estimate, we’re still in a balanced budget position in Canada," Flaherty said. He is planning for budget surpluses of $2.3 billion this year and $1.3 billion next year – provisions that some critics consider inadequate in a time of economic uncertainty payday loans.

"We’re going to have relatively small economic growth in Canada this year," Flaherty added. "But we knew that and that’s why we acted to create the stimulus that we did last year."

He was referring to cuts in personal and corporate income tax, as well as a GST reduction, introduced in the Conservatives’ fall mini-budget.

Flaherty and the finance ministers of the U.S., Germany, Italy, Britain, Japan and France met yesterday in an atmosphere of widespread uncertainty and fear about how much the world economy could be hurt by the turmoil on financial markets sparked by last summer’s subprime mortgage meltdown in the United States.

Banking authorities and private economists are admitting the potential for deep economic damage has been underestimated. Central banks, including Canada’s, have been chopping interest rates in hopes of prompting improved business conditions. And the U.S. Federal Reserve has employed rarely used emergency bailout measures to help investment banks.

The IMF, which was set up to foster economic stability, has raised fears of a repeat of the Great Depression of the 1930s by forecasting that losses from the current crisis in financial markets could reach $1 trillion. And the IMF said this week that there is a 25 per cent chance that a global recession could result if economic conditions continue to deteriorate.

While dismissing that possibility, Flaherty acknowledged that "there are still significant concerns about the slowdown in the United States."

Yesterday’s meeting of G-7 finance ministers and further meetings today of IMF member nations come as the world is looking for ways to keep the current economic malaise from spreading.

Allied with that effort, IMF member countries are looking at long-term reforms, which include setting larger capital requirements for banks and closer monitoring of financial activities by regulators.

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