Saturday, July 5, 2008
Group of Eight meets amid 'financial disorder'
SAPPORO, Japan | What with surging oil prices, food inflation and a credit crunch that has depressed global growth, leaders from the Group of Eight economic powers face the gravest combination of economic woes in at least a decade when they gather next week.
The outlook has darkened dramatically since last year's summit in Germany, when the leaders declared the global economy was in "good condition" and oil cost $70 a barrel - which seemed high at the time.
Since then, the U.S. subprime-mortgage crisis has erupted, roiling markets and battering major financial firms. Oil has doubled to above $140 and food prices have jumped, hurting the poor in particular and raising the threat of political instability.
"Things have changed for the worse across the board," said Robert Hormats, vice chairman at Goldman Sachs in New York.
Mr. Hormats argues that the economic problems now are more serious and widespread than during the Asian financial crisis of 1997-98, where the pain was largely limited to emerging markets.
"Now you have a financial disorder where the epicenter is the U.S.," he said. And fuel and food inflation "are serious matters that affect large numbers of people."
Host Japan had put global warming at the top of the summit's agenda, but the dilemma of how to respond to accelerating inflation and slowing global economic growth could grab the spotlight.
Prime Minister Yasuo Fukuda has said he hopes the July 7-9 meeting at a hot-springs resort in Hokkaido, Japan's northern island, will "show some direction" in tackling oil and food prices but stressed it was only "one step" in a longer process.
On oil, analysts are skeptical that the G-8 leaders — representing Britain, Canada, France, Germany, Italy, Japan, Russia and the United States - will come up with much beyond urging major petroleum producers to boost output, repeating the message of their finance ministers who met last month in Osaka.
Foreshadowing possible disagreement among the leaders, the finance ministers were divided on where to assign blame for the run-up in oil prices. France, Germany and Italy held speculators largely accountable, while Britain and the U.S. said the focus needed to be on boosting production capacity, which has barely kept up with growing global demand.
Soaring crude prices have already forced India, Indonesia and Malaysia to cut subsidies and raise state-set prices on gasoline and other fuels. Last month, China raised fuel prices as much as 18 percent.
At the same time, prices of corn, wheat, rice and soybeans and other farm goods have surged owing to changing diets, urbanization, expanding populations, extreme weather, growth in biofuel production and speculation.
Spiraling fuel and food costs could drive millions into poverty, the Asian Development Bank has warned. In India, inflation has jumped to a 13-year high of 11.4 percent.
On the food front, the G-8 leaders may announce an aid package or pledge agricultural investment in poorer countries, experts say.
The credit crisis and global market turmoil are sure to be discussed, but with central bankers absent, the leaders will most likely avoid saying anything specific about interest rates and currencies.
Overall, the summit's main goal will be demonstrating confidence that the leaders can "work through the oil crisis without causing the global economy to melt down," said Tom Cooley, dean of New York University's Stern School of Business.