G7 finance ministers last night played down threats to global economic growth linked mainly to a softening in US demand and sustained high oil prices. Instead, the officials reiterated their faith in “continued prosperity”.
The G7 economies “remain strong amid moderating growth in the US,” the ministers said. “Growth in the euro zone, after accelerating, should remain strong and more balanced in the second half of the year [while] growth in the UK is becoming stronger and more balanced.”
US Treasury secretary Hank Paulson said that while the American economy had slowed it was still “quite healthy” and was now growing at a “sustainable rate” buoyed by healthy external demand and improved wage income and strong capital spending in the US.
European Central Bank president Jean-Claude Trichet said was “growth in the eurozone area that is the highest for six years” and has come in “above expectations” at 2.4-2.5% –only one percentage point behind the US, pointing to a significant “rebalancing of growth”, according to the ECB chief.
The G7 identified “potential downside risks”, including tight and volatile energy markets, rising inflation expectations in some countries, and the spread of protectionist tendencies. “We are of the view that high energy prices reflect both rising demand from strong global expansion and concerns about current and future supplies, although prices have eased recently.”
The ministers made a fresh attempt to get multilateral trade negotiations back on track. “We urge all parties to show the political will and flexibility necessary to resume the Doha Development Round as soon as possible, in order to achieve a comprehensive package in agriculture, industrial products, services, intellectual property and WTO trade rules.”
European officials warned of protectionist impulses, with European Commissioner Joaquin Almunia insisting the Doha Round could still be revived: “I believe it’s still possible to get a constructive solution,” he said. Paulson also said a solution “is still possible.”
On exchange rates, G7 ministers reiterated that “rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange rate closely and cooperate as appropriate. Greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, China specially, for necessary adjustments to occur.”
Hu Xiaolian, head of China’s State Administration for Foreign Exchange, said Beijing was not under any “special pressure” to accelerate its efforts to allow the yuan to rise more. But Paulson called on China last night to “show more flexibility and to move more quickly on exchange rate adjustment.”
The G7 acknowledged that “fundamental reform is necessary for the IMF to maintain its legitimacy, relevance and credibility in the changing global economy. We welcome the resolution on quota and voice reform now being considered by IMF governors and urge all members to support it,” the ministers said in their communique.
In a veiled rebuke of China, which has been criticised for making relatively high-interest loans to African countries recently, the G7 said that “while welcoming the increasing role of new donor countries, we believe it is imperative that all donors share information and take account of debt sustainability in their lending practices.”