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The Econo Miss

by Archives February 12, 2008

When G7 ministers met in Tokyo last Saturday, they did their best to dampen fears of the slowdown of global economic growth for 2008, despite admitting that prospects for the world economy are much worse than they predicted last October.
The G7 blamed tighter credit, the declining United States housing market, increasing oil prices and increasing inflation as the major contributors to reduced economic growth. Canada, France, Japan, the United Kingdom, Germany, Italy and the United States called on The Organization of the Petroleum Exporting Countries (OPEC) to increase oil production and avoid the associated inflation seen with the $100US-per-barrel mark. In addition to increasing oil production, they also called for boosting refining capacity and more energy efficiency for its members.
Despite rising food and commodity prices, G7 members emphasized the fundamentals are in place for long-term growth and that emerging market economies would continue to be robust in their expansion.
The American credit woes and declining employment rates prompted all G7 members to concede that short-term growth would decrease by varying degrees in each national economy. Last week’s report from the Institute of Supply Management (ISM), an American statistics-gathering group surveying purchasing managers in the manufacturing and service industries, again increased recession fears. Business activity and production in the United States came in at 41.9 points compared to 54.4 points in December; this shows the economy is contracting and some analysts say that being at less than 50 points indicates a recession.
The American Financial Stability Forum released an interim report with its own guidelines to increase stability in the world markets. The report stressed confidence in the credit worthiness of financial institutions, appropriate valuation of assets and risks, and capital and liquidity buffers. Due to past market deregulation, the report also emphasized full and prompt disclosure of assets and pointed to the fundamental role central banks play in decreasing uncertainty and boosting consumer and corporate confidence.
G7 ministers also approved China’s decision to increase the flexibility and stability of its currency, as excess volatility is unsuitable for economic growth. As the yuan steadily increases against the American dollar, China exports inflation to the United States because Chinese products increase in price for the average American consumer. The main concern for the Europeans was the Japanese yen. The weakness of the yen presents the sluggish European economy with added pressures in its external sources of growth. The reliance by the Japanese on the American economy is a concern for investors because most Japanese exports end up in the United States. Some economists think that Japan is already heading into recession. The Japanese government has lowered its forecast for growth by the end of March from 2.1 to 1.3 per cent. Hedge funds removed 31 per cent of investments from Japanese stocks last year.
As the credit crunch continues to spread into new sectors, finance ministers are looking for better regulations and bank transparency. However, a coordinated response from G7 leaders will be needed to address weaknesses in the global financial systems to prevent problems on this scale from resurfacing again.

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