G8 leaders meet as spectre of stagflation grows

Business Features

Jun 28, 2008, 6:36 GMT

Berlin - The world's most powerful industrial nations meet next month amid the scenic splendour of the Japanese island of Hokkaido to try to steer the global economy back onto an even keel as a deepening sense of foreboding sets in about the international economic outlook. The Group of Eight (G8) leaders will gather against the backdrop of growing global fears that the credit crunch, rising interest rates and resurgent inflation could trigger a sharp economic slump by the end of the year. 'A benign outcome does not look very likely,' Kenneth Wattret, BNP Paribas' chief eurozone economist told the Deutsche Presse-Agentur dpa, with inflation and the brittle global economic mood having edged its way up to the top of the G8 summit agenda. The summit in the small resort town of Toyako on the foreshores of the glistening blue waters of Lake Toya is likely to come just a matter of days after the European Central Bank leads the way to higher global interest rates when it hikes the cost of money to ward off inflationary pressures triggered by spiralling oil and food prices. The global economic outlook appears on a knife edge, with G8 finance ministers already warning that the international economy faces headwinds amid concerns that contracting growth and rising inflation means that the spectre of 1970's-style stagflation could be on the horizon. Combined with the world's key central bankers talking tough on rates, evidence that the global economy is edging dangerously close to the brink of a new economic abyss also risks sparking another round of volatility across the world's financial markets. 'The bigger risk is a renewed slowdown by the end of the year and even possibly of a recession in 2009,' said Rainer Guntermann, European economist with the investment house Dresdner Kleinwort. Annual inflation in the 15-member eurozone surged to a 16-year high of 3.7 per cent in May, with consumer prices in Britain hitting an 11-year high of 3.3 per cent and US inflation coming in at 4.2 per cent. But the global economy is now more divergent than it was during previous downturns with world growth holding up better than expected in the face of the tensions sparked by the financial market and US mortgage crisis. To date, parts of Europe as well as leading emerging economies such as China and India have continued to clock up solid growth rates despite the economic gloom in the US. However, the relatively placid economic slowdown that has emerged this year in several key economies has done little to help to squeeze inflationary pressures out of the global economy. What is more, US exporters might be reaping the benefits of the weaker dollar, but a soft greenback also helps to fuel the type of inflationary pressures which US Federal Reserve chief Ben Bernanke has been warning about. With this in mind, the rhetoric of US officials has suddenly switched to talking up the benefits of a strong dollar, which analysts say might help to stabilize the greenback in the coming months. Even so, with the dollar bumping along near record lows and the US consumer rattled by rising unemployment, escalating prices and a housing market turned sour, exporters could face more of a battle to sell their goods in the world's biggest economy. As a consequence, this could eventually help to dampen the expansion rates in leading emerging economic powers such as China, India, Brazil, South Africa and Mexico which have again been invited to attend the G8 summit. But central banks in emerging economies in both Asia and Europe are also likely to have to raise borrowing costs to try to clamp down on what in some cases is rampant inflation. While inflation in China eased to a still high 7.7 per cent in May, prices in India jumped to a 13-year high of 11.05 per cent for the week ending June 7. In parts of central Europe, inflation tops 17 per cent. Either way, such an uncertain economic environment is hardly conducive to the world's leading trading powers reaching a conclusion in the so-called Doha Round on agricultural subsidies. At the same time, the stalling economy in G8 host nation Japan has been unable to offset the more fragile growth picture that has taken shape in other parts of the world. Tokyo this month set out a grim outlook for both exports and profits, as a consequence forcing the Bank of Japan to sit tight on rates despite the gathering inflation threat. The signs of the increasing economic growth risks posed by =inflation might have come just as hopes have been rising that the economic upheaval unleashed by the US housing market turmoil could soon slowly start to ease. But a rising tide of mortgage foreclosures and collapsing house prices still has to work its way through big chunks of the western economy with worries that Britain and large swathes of the eurozone could be battling to head off recession as the rest of the year unfolds.

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Adam SeleneJun 28th, 2008 - 14:52:32

Quoting the article:''What is more, US exporters might be reaping the benefits of the weaker dollar, but a soft greenback also helps to fuel the type of inflationary pressures which US Federal Reserve chief Ben Bernanke has been warning about.''

Fuels, not 'helps' to fuel. Ninety-five percent of all fiat currencies are bookkeeping at the banks, not printed money. With the fall of the US dollar, US goods and services suddenly become a bargain to foreign buyers. Prices in the US then rise to meet this new demand. It is a case of our fractional reserve chickens coming home to roost.

Unfortunately, we are talking about multiple fiat currencies and the managers of some currencies do not see eye-to-eye with the managers of other currencies. We can count one thing. There are not enough chairs to go around and many will be left standing when the music stops.

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Richard William Homo IIIJun 30th, 2008 - 07:33:29

As the toughest of all the Homos I will have the courage to say this: abolish the so-called World Bank, the IMF, and the G8.

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NoharnessJul 2nd, 2008 - 06:43:47

G8 means NOTHING.

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patriotJul 4th, 2008 - 16:15:36

March to Nationanlize US Oil Industry held on 9/11/08 in Los Angeles, CA

The march is scheduled for September 11, 2008 at the Federal Building 11000 Wilshire Blvd., Los Angeles, CA, Usa.
Congress WILL nationalize the oil industry!
CHANGE for America, for Americans.

THE AMERICAN REPUBLIC
A Sovereign Republic

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giVEJul 6th, 2008 - 00:16:35

America back to its initial inhabitants: the native peoples of North America.

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SP4: that'd be fine except...Jul 7th, 2008 - 19:55:58

..for the fact that all the indicators say we will have 1.2% GROWTH this year (adjusted UP from 1%) and HIGHER (1.5 TO 1.7%) next year! While not the robust numbers we'd like, this is hardly a 'recession'.

Remove the rise of oil and some other key commodities, the mortgage mess, none of which is anyone's fault except the lenders, and this would not be happening.

Bush, correctly, warned Americans about capping domestic production and instead they thought liberals lampooning him was fun, while they went out to buy SUV's.

Tell me, anyone still laughing, besides Bush right in your faces?.

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