News Room - Business/Economics

Posted on 16 Jun 2008

G-8 finance ministers warn of threats to global economy

The global economy faces a one-two punch from slowing growth and soaring fuel and food prices, finance ministers from the world's richest nations warned Saturday, though they stopped short of offering concrete solutions.

Finance ministers from the Group of 8 industrialized nations wrapped up a two-day meeting in Japan that was dominated by talk of rising petroleum prices, which have set off street protests across the world. In a statement, the ministers said higher prices of oil and other commodities threatened the world economy at a time when it was still reeling from the collapse of the housing market in the United States.

The ministers urged oil-rich nations to increase production to help reverse a trend that has pushed up oil prices to nearly $140 a barrel, a record. The ministers also warned that the rising cost of oil and other commodities could spur broader increases of prices and wages.

The specter of fighting inflation as the ministers try to revive their flagging economies would "make our policy choices more complicated," the statement said. The combination of inflation and low growth, known as stagflation, is difficult to escape because steps to spur economic activity, like lowering interest rates, can also lead to price increases.

"For a long time, the world economy enjoyed a combination of robust growth and low inflation, but it now faces headwinds," the statement said. "Elevated commodity prices, especially of oil and food, pose a serious challenge to stable growth worldwide."

The G-8 nations - Britain, Canada, France, Germany, Italy, Japan, Russia and the United States - are many of the world's largest consumers of oil. But most have little say over production, and over drivers of oil prices like rising demand from China and India.

The ministers also failed to find common ground on whether to take action to curb speculation in oil futures markets, which some have blamed for exacerbating price increases. While Italy called for measures like making futures trading more expensive, this was resisted by the United States and Britain, where big futures markets operate.

"It is sometimes difficult to distinguish between an airline that may hedge its fuel price, which is perfectly sensible planning, and someone who is speculating or even gambling on the price of oil," said Alistair Darling, Britain's Chancellor of the Exchequer.

The U.S. Treasury secretary, Henry Paulson Jr., attributed higher oil prices to changes in supply and demand and a failure by oil-rich nations to build enough wells and refineries.

"At its heart, this run-up in price reflects long-term trends in global supply and demand and strong economic growth coinciding with a period of minimal investment in oil production," Paulson said at a news conference. "This is not something that lends itself to short-term solutions."

As a compromise, the ministers asked the International Monetary Fund to look into what was driving the recent surge in oil prices. The ministers also called for aid to help developing nations in Africa and elsewhere deal with higher prices of commodities, particularly food ingredients.

The ministers met to help work out the agenda for next month's summit meeting of G-8 heads of state in northern Japan. Speaking to reporters after the meeting, they said they also discussed steps to soothe financial markets and help developing nations fight global warming.

One item not discussed, despite wide expectations that it would be, was currencies, and particularly the possibility of intervention to prop up the slumping U.S. dollar. Japan's finance minister, Fukushiro Nukaga, the host of the meeting, said currencies were discussed only on the sidelines.

At the news conference, Paulson brushed aside questions about intervention.

"A strong dollar is in our nation's interest," he said, adding that solid fundamentals in the American economy would eventually help the U.S. currency recover.