Hurricane Rita, which is churning its way towards Texas, threatening another surge in oil prices and highlighting the danger to global growth and prices, is expected to top the agenda at today's G7 finance ministers' meeting in Washington. But differences between the US and Europe over how to tackle the latest oil crisis may prevent any real breakthrough.
The ministers will hear upbeat reports from the IMF and others on global economic prospects for 2005-06. But even in the short space of time these have taken to prepare, the rocketing oil price has introduced uncertainty and growth estimates may have to be revised down, analysts say.
US Treasury Under Secretary for International Affairs Tim Adams suggested yesterday that Hurricanes Katrina and Rita could lop 1% off the US growth rate this year.
The Bush administration will urge measures to increase supplies of oil and curb supply interruptions, while European governments will focus on measures to reduce consumption. With such basic differences of approach, policy agreements may not be possible, and the G7 may take the unusual step of issuing a separate statement on oil, laying out various policy options.
Central bank governors in Washington for the G7 and other meetings will meanwhile consider the implications of soaring oil prices for inflation and interest rates. Any sharp ratcheting-up of rates to pre-empt inflationary pressures from the oil price hike could puncture confidence and investment, and also burst asset bubbles, analysts say.
Currencies will also be high on the G7 ministers' agenda. US Treasury secretary John Snow is expected to apply more pressure on China to liberalize the yuan exchange rate further, to help ease global financial imbalances. China's response will depend partly on how serious it perceives to be the US threat to impose savage tariffs on Chinese imports.
In a concession to pressure for the size of their forum to be expanded, the G7 ministers will again invite their counterparts from Brazil, Russia China, India and South Africa to join them at a special lunch to discuss policy coordination. This is seen as a possible precursor to the formal enlargement of the G7 to include these four major emerging markets. Adams suggested this week that the five could be 'on a glide path' to achieve full membership