Storm clouds deepen over world economy

Nathaniel Harrison

PARIS - Storm clouds deepened over the global economy early this week as oil prices and eurozone inflation hit records, and the world’s top Central Bank Forum warned that fallout from the financial crisis could worsen.

“With a significant risk of recession in the United States, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point,” the Swiss-based Bank for International Settlements (BIS), warned in a report.

“These fears are not groundless.” Emblematic of a sharply deteriorating economic climate, Ireland, which not so long ago was a model of economic good health, saw its growth contract by 1.5 per cent in the 12 months to the first quarter.

Late last week the economies of two other European powers, Britain and France, were also reported to be faltering in the face of rampant spikes in oil prices, a credit drought and a crumbling property market.

The seemingly inexorable rise in oil rates, with a barrel of New York light sweet crude rising to an all-time high of 143.67 dollars on Monday, was to figure prominently at a meeting in Madrid of the World Petroleum Congress.

But the gathering of 3,000 ministers, corporate leaders and analysts appeared stymied by disagreements over just what is driving the sky high prices speculation, supply shortages or the depreciating dollar.

Crude futures have doubled in the past year and have risen by almost 50 percent since the start of 2008, when they breached 100 dollars for the first time, triggering fears of inflation and economic paralysis.

Consumer countries blame record prices on tight supplies amid strong demand and unrest in producer countries such as Iran, Iraq and Nigeria. In particular, they accuse OPEC of not producing enough crude.

The Organisation of Petroleum Exporting Countries insists that the weak dollar is at fault.

The dollar fell further against the euro on Monday, fuelling demand for oil, which is priced in the US unit, from traders holding stronger currencies.

Whatever the cause, the impact of rising oil rates has been plain to see in the 15-nation eurozone, where annual inflation was reported on Monday to have shot to a record 4.0 percent in June.

Mounting upward price pressures, which have sparked bitter protests by European fishermen and truckers, are bedeviling businesses as they struggle with flagging consumer demand.

European Central Bank policymakers are to convene on Thursday when by most accounts they will approve a quarter point hike in their benchmark interest rate to 4.25 percent.

But they are grappling with an acute dilemma. Prices are rising sharply as the eurzone economy shrinks, forcing the ECB to choose between tackling inflation with higher interest rates or trying to stimulate growth with cheaper credit.

Adding to the gloom on Monday was a report from the BIS, known as the central bankers’ central bank, which said that the global economy could be in for a severe downturn.

The BIS pinpointed “imprudent and excessive credit growth” as the root cause of the current crisis, in its latest report.

The bank contended that rate setters should tend towards vigilance even in good times in order to discourage excessive borrowing.

While it was difficult to predict the severity of a downturn, it appeared that a “deeper and more protracted global downturn than the consensus view seems to expect” was on the way, the BIS said.

It dampened hopes that emerging markets, which have been booming, would offset the slowdown, saying that many of these markets were significantly dependent on external demand, notably from the United States, the world’s largest economy.

The global financial sector has been under pressure for a year, in a crisis during which banks and financial institutions reported sharp losses and massive asset writedowns.

For the BIS, the subprime mortgage market or credit given to borrowers with poor credit ratings, which was widely blamed for the crisis, was not a root cause of the turmoil, but a trigger.

The real culprit, it said, was simply lax credit.

Years of cheap borrowing had led to an extraordinary accumulation of debt.

In the United States, the ratio of household savings to disposable income was about 7.5 percent in 1992. The ratio fell sharply in the early 2000s. By 2005, it had plunged to almost zero.

This differentiated the current financial turmoil from other crises, when Governments or States going bankrupt was often the issue. In other words, “in sharp contrast to recurrent sovereign debt crises ... there are now millions of troubled borrowers, particularly US households, as well as a myriad of lenders.”

AFP