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G-8 Says Economy Faces `Headwinds,' Oil a Threat

By Simon Kennedy

June 14 (Bloomberg) -- Finance ministers from the Group of Eight nations singled out spiraling food and fuel prices as their chief concern as they warned ``headwinds'' dog the global economy.

``The world economy continues to face uncertainty and downside risks persist,'' the officials said in a statement after meeting today in Osaka, Japan. ``Elevated commodity prices, especially of oil and food, pose a serious challenge.''

Inflation concern is mounting after the price of oil reached an unprecedented $139.12 a barrel last week and food costs from rice to soybeans set records this year. Central banks are already shifting toward tighter monetary policy even as expansion fades.

``The global focus for now has turned to the inflationary risk,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``The G-8 meeting affirmed that.''

The ministers stuck to their practice of not making a joint comment on currencies when central bankers are absent from the talks. Even so, U.S. Treasury Secretary Henry Paulson and French Finance Minister Christine Lagarde spoke in favor of a strong dollar.

`Strong Dollar'

``A strong dollar is in our nation's interest,'' Paulson told reporters. Lagarde said she was ``happy to hear'' that view.

The ministers cited further declines in U.S. house prices and stresses in financial markets as other risks to growth, while noting market conditions improved since they identified the credit squeeze as the major concern at their last meeting in April.

Mario Draghi, the head of the Financial Stability Forum, said there is ``fragile stability'' in markets and inflation has replaced tighter credit as the world economy's biggest obstacle.

The doubling in the price of oil in the past year was described as a ``strong'' concern by the officials, who urged producing nations to increase output and enhance their refinery capacity. Markets should promote transparency and consumers must use energy more efficiently, they said. Emerging markets were pushed to cease subsidizing food and fuel prices.

The International Monetary Fund predicts the fastest inflation in advanced economies since 1995 this year even as they grow at their slowest pace in seven years. Rising prices threaten to damp growth further by sapping household budgets and boosting production costs. They have also sparked protests from Malaysia to Spain.

Price Increases

UAL Corp.'s United Airlines, the world's second-largest carrier, this week said it will start charging passengers more to check luggage, while Dow Chemical Co., the largest U.S. chemical maker, said last month it will raise prices by the most in its 111-year history.

The inflationary outbreak is grabbing the attention of central banks after 10 months in which they focused on insulating growth from the credit squeeze. The Federal Reserve is set to leave its key interest rate at 2 percent this month after seven cuts since September. The European Central Bank may raise its main rate to 4.25 percent in July.

There were disagreements over what's driving the surge in commodity prices. Lagarde and Russian Finance Minister Alexei Kudrin argued investors are buying oil and food as a hedge against the dollar's drop. Paulson downplayed the link by noting oil's gain outpaced the dollar's decline since 2002.

Disagreement on Oil

The U.S. Treasury secretary also refused to blame speculators for higher prices, saying ``all the evidence'' points to tight supply and robust demand. Italian Finance Minister Giulio Tremonti disagreed by calling on governments to ``fight speculation.''

The G-8 has had limited success in tempering oil prices since first lobbying for more supply in 2004, when crude cost about $40 a barrel. Goldman Sachs Group Inc. and Morgan Stanley predict oil may soon pass $150.

Oil consuming and producing nations are to meet later this month in Saudi Arabia. While OPEC President Chakib Khelil this week said ``supply is more than enough,'' Saudi Oil Minister Ali al-Naimi yesterday called record prices ``unjustified'' and the state oil company signaled it may soon start pumping from a new field.

The dollar this week had its biggest weekly gain against the euro since 2005 on bets the G-8 governments would signal they favor further increases.

``A strong dollar is in our nation's interest,'' Paulson said after the meeting. Lagarde said she was ``happy to hear Paulson clearly say how much the strong-dollar policy is indispensable.'' Japanese Finance Minister Fukushiro Nukaga said there was no discussion of intervention among the G-8 ministers.

The G-8 is composed of the U.S., Japan, Russia, Germany, France, the U.K., Italy and Canada. Its finance ministers met to form an agenda for when leaders convene next month in Hokkaido.

To contact the reporter on this story: Simon Kennedy in Osaka, Japan, at [e-mail].

Last Updated: June 14, 2008 04:17 EDT

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