Relaxed G7 Happy with Economy, Oil a Risk
Sat Apr 24, 7:43 PM ET Add Business - Reuters to My Yahoo!
By Gernot Heller
WASHINGTON (Reuters) - Finance chiefs from the world's rich nations agreed on Saturday the global economic outlook had brightened significantly but the threat of further oil price rises was one of the few clouds on the horizon.
Government ministers and central bankers from the Group of Seven economic powers stopped short of recommending action on energy costs, in part because of differences on how severe an impact oil price rises would have on their economies.
"Prospects are favorable and although risks remain, such as energy prices, overall the balance of risks to the outlook has improved," G7 officials said in a communique after their Washington gathering alongside spring meetings of the International Monetary Fund (news - web sites) and World Bank (news - web sites).
European ministers appeared more anxious than their U.S. counterparts about the threat from oil.
"The principal risk is the oil price risk," said French Finance Minister Nicolas Sarkozy. His German counterpart Hans Eichel said he hoped planned output cuts by the Organization of Petroleum Exporting Countries would not become a reality.
Concerns were tempered, however, by a presentation to the meeting by U.S. Federal Reserve (news - web sites) Chairman Alan Greenspan (news - web sites) who, according to French officials, explained that precautionary stock building was partly behind surging energy costs.
WARM GLOW
Still, discussion of the risks could not disguise an overarching contentment with world growth this year that is forecast to come in at its fastest pace in four years.
Not even the noise of thousands of pot-banging, whistle-blowing demonstrators -- angry at the treatment of highly indebted poor countries by multilateral Western institutions -- seemed to darken the G7 mood.
The ministers sounded more sanguine about the economy's fortunes than even 2-1/2 months ago, saying the recovery "continued to strengthen and broaden" since they last met in Boca Raton, Florida, in February.
The G7 -- the United States, Britain, Canada, France, Germany, Italy and Japan -- met as key economies like the United States and even Japan show persuasive signs of gaining momentum that finance ministers expect to be sustained.
"Beyond the United States, there is also good news," U.S. Treasury Secretary John Snow told a news conference. "Japan has turned in several good quarters, as has the United Kingdom."
Snow said growth in Germany and France must be stepped up. European officials acknowledged this lag.
"I explained our analysis of the euro area situation. I confirmed that we had a gradual recovery," European Central Bank President Jean-Claude Trichet told a news briefing -- stressing that the ECB had not faced any G7 demands to ease its currently neutral stance on interest rates.
TONE IS UPBEAT
With the dollar's recovery since the Florida meeting pushing foreign exchange down the agenda, the communique stuck to wording adopted in February that warned against excess currency volatility.
The ministers also repeated a call first made in Dubai last September for "more flexibility" in exchange rates -- language seen as referring to China's rigid yuan peg to the dollar.
The dollar, under heavy pressure going into the Florida meeting, has partly recovered and this has clearly come as a relief to G7 participants that export to U.S. markets.
"It is not clear whether there was a link, like the cause and effect, on foreign exchange since the statement of the G7 in Boca Raton. But all in all, G7 and Italy consider positive the development of foreign exchange since Boca Raton," Italian Economy Minister Giulio Tremonti said.
TEMPORARY PRICE HIKES?
Energy prices were not the only danger sign on official radars this weekend.
Earlier this week, the International Monetary Fund warned about the potential impact of higher U.S. interest rates, now considered inevitable.
Bundesbank Vice President Juergen Stark told reporters: "There are signs that the present situation of globally low interest rates does not necessarily have to persist."
Snow conceded the recovery would likely generate some moderate inflation pressures but in general "we look at a fairly benign cost outlook."
Generally, though, G7 members looked forward to the end of a stretch of weak global growth and pledged to use the upturn to repair damaged budgets and seek long-term economic reforms.
The G7 members agreed to work for "sustained medium-term fiscal consolidation" as growth picks up, an apparent reference to tackling big budget deficits.
Snow repeated a U.S. vow to halve its deficit by 2009.
A senior U.S. Treasury official told reporters there had been considerable discussion in the meeting about the risk of economic overheating in China and said ministers recognized this as a danger to global expansion.
He said a place at the top economic table for China may have to be considered but that it was not a U.S. decision.
"China is a critically important player in the global economy -- and yes, I think some role for them participating in the meetings at some point in the future will clearly (be) useful," the official said. (Additional reporting by Ritsuko Ando, Cyrille Cartier, Sumeet Desai, Francesca Landini, Gilbert Le Gras, Brian Love, Anna Willard, Andrea Hopkins, Tim Ahmann, Jonathan Nicholson, Alister Bull in Washington and John Parry in New York)