Wheels Of Economy Are Turning Happily, But There Are Risks Ahead
The Age
Monday November 20, 2006
THE global economy is enjoying a period of strong growth and low inflation unparalleled since the 1960s, but there are risks to the rosy outlook, economic leaders told the G20 summit.
Inflation pressures and the risk of a spillover from the crashing US housing market were top on the list of concerns raised, while some officials renewed warnings about unsustainable global imbalances.Central banks will need to keep raising interest rates to curb inflation, the G20 group of the world's 20 largest economies said in its final communique yesterday.Simmering tensions over China's currency regime were smoothed over at the meeting, with officials saying greater flexibility was only a matter of time.For now, the world was in a rare period of synchronised growth across all major economies, and continued strength in the emerging markets such as China and India should help to offset the slowdown in the US."One of the optimistic things about the global economy at the moment is that you've got growth in America, Japan and Europe - we haven't had world growth on multiple engines for a while," federal Treasurer Peter Costello said. But solid economic growth has also heightened the risk of rising inflation.The G20 said in its statement that managing strong growth and containing inflation would require "ongoing adjustments" to interest rates.The managing director of the International Monetary Fund, Rodrigo de Rato, said spare capacity was running out, which could renew inflation pressure.He singled out the US housing market as the biggest risk to global growth. Mr de Rato said the housing slump would "undoubtedly" have some effect on US household spending. "The situation is likely to get worse before it gets better."Data on Friday showed an unexpectedly steep 14.6 per cent fall in US housing starts in October to a six-year low. The figures dashed hopes on Wall Street that the worst of the housing downturn was over.US Federal Reserve Chairman Ben Bernanke gave the forum an assessment of "the issues the US is grappling with," Mr Costello said, without elaborating.An abrupt slowdown in US demand would hurt the countries that export to the US, but a gradual slowing could help to ease the massive US current account deficit and international trade imbalances.But there was no finger-pointing on global imbalances, and South Africa's Finance Minister, Trevor Manuel, said G20 members were not going to "beat up" on each other over issues such as China's currency.The United States renewed a longstanding call for more flexibility in China's exchange rate, arguing that China's low currency was keeping its exports artificially cheap. "The world economy works best on the basis of free and fair trade, (and) flexible exchange rates determined by the marketplace," US Deputy Treasury Secretary Robert Kimmitt said.Mr Kimmitt met the gov-ernor of China's central bank, Zhou Xiaochuan, at the summit. Mr Zhou said he had not felt pressure from other countries on currencies, and he said China's financial sector was better placed to deal with increasing currency flexibility because it was much stronger than during the Asian crisis of 1997-98.The G20 was formed in response to the Asian crisis, and comprises the world's 19 largest economies plus the European Union, and accounts for about 90 per cent of global economic output.
© 2006 The Age