Risks to global economic outlook ‘firmly on downside’: G-8 chiefs
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TOKYO, Dec. 26 — Group of Eight leaders forecast global growth will be solid next year, but risks to the outlook ‘’are firmly on the downside'’ due mainly to ‘’uneven conditions'’ in financial markets stemming from the U.S. subprime mortgage turmoil, according to draft discussion papers for the G-8 summit next July in Japan.
The leaders have also grown concerned about the flow of speculative funds into the oil, metal and other raw materials markets, calling the phenomenon a ‘’threat'’ to the world economy, according to the draft papers, which will serve as a basis for talks by G-8 members in preparation for the summit.
‘’Looking forward, global growth will be solid, while risks to the outlook are firmly on the downside,'’ say the papers, copies of which were obtained Wednesday by Kyodo News. ‘’We see that the functioning of financial markets is improving, but uneven conditions are likely to persist for some time.'’
‘’We acknowledge that securitization and financial innovation have contributed significantly to the growth of the global economy, yet their shortcomings were exposed recently, such as in the areas of liquidity and risk management and methodologies and use of credit rating agencies,'’ they say.
To prevent a recurrence of the subprime woes, G-8 leaders are expected to consider ensuring greater transparency in financial markets and reviewing the roles of credit rating agencies, whose lax evaluations of subprime-related securities products have been blamed for exacerbating the problem, the papers show.
Japan — which will host the July 7-9 summit at the Lake Toya resort area in Hokkaido — is eying climate change, African development, nuclear proliferation, and high oil prices and other economic issues as four major agenda items at the annual event, which brings together leaders from Britain, Canada, France, Germany, Italy, Japan, Russia and the United States.
‘’As soaring price levels of raw materials negatively affect different markets, we need to provide the ‘fundamentals’ of the materials so as to enhance greater predictability of the market,'’ the papers say.
‘’Compilation of statistics, as well as market analyses, on base metals could be the key to stabilizing the much-fluctuating market prices of such metals, thereby countering the threat posed by inflows of capital to the raw materials market.'’
Similarly, the papers show G-8 leaders have grown jittery over spiking oil prices and large global imbalances, saying, ‘’Surging oil prices are causing inflationary pressures, and persistent large global imbalances still remain a significant downside risk.'’
Global imbalances are most symbolically represented by the huge U.S. current account deficit versus large surpluses and dollar reserves that fast-growing China has accumulated.
The papers cite ‘’greater flexibility of the RMB (renminbi)'’ or the yuan as a step China can pursue to help unwind the imbalances.
The Group of Seven nations — the G-8 minus Russia — have been urging China to speed up its currency system reforms. U.S. lawmakers and manufacturers complain that Beijing keeps the yuan artificially low to benefit its exports.
According to the papers, the leaders plan to take up the issue of a lack of transparency in new types of investors such as sovereign wealth funds, state-owned enterprises, private equities and hedge funds as part of efforts to mitigate ‘’some risks of protectionism'’ against foreign investment in developed countries.
The G-8 leaders are also likely to seek concerted efforts among developed nations to set up international rules to ensure food safety, including issues related to mad cow disease and Chinese-produced food. The leaders plan to study a cooperation framework between developed and developing countries over enforcement of such rules.
‘’As we have recently witnessed some alarming cases in which contaminated food is being exported from emerging economies, especially China, assistance to those emerging exporters in need, as well as exchanging information among ourselves, could be the key to minimizing the damage,'’ the papers say.
Moreover, the leaders are expected to discuss the issue of globalization and inequality, including factors over ‘’increasing resistance to globalization,'’ such as internal disparity, which may spur protectionism.
The leaders are likely to agree that governments must implement reforms aimed at narrowing the domestic productivity differentials among different industries and regions, and strengthening education and training to ensure that workers have the appropriate skills, according to the papers.
Filed by Catherine Tsalikis under Macroeconomic Policy, Multilateral Trade