The fastest global economic growth in three decades will slow next year, complicating efforts by the Group of Seven industrial nations to pare budget deficits and unemployment.

Record oil prices that US Treasury Secretary John Snow calls an "economic headwind," rising interest rates and the first drop in global stocks in six quarters prompted chief economists from the International Monetary Fund, Goldman Sachs Group Inc and Brown Brothers Harriman & Co to cut forecasts for 2005. Morgan Stanley says there is a 40 per cent chance of a worldwide recession next year.

"The economy is keeling over," billionaire financier George Soros said in an interview last week. "The markets are reacting to rather dim economic prospects."

Snow and other G-7 finance ministers concluded a meeting in Washington on Friday with a plea for oil producers to help knock down oil prices by ensuring "adequate supplies." An economic slowdown of any size may mean fewer jobs and tax revenues, with European unemployment already at a 4 1/2 year high of 9 per cent, Japan still battling deflation and the US facing a record budget deficit. The G-7's request came the same day crude oil futures closed at more than US$50 a barrel for the first time in New York, after a 68 per cent surge in the past year.

"What matters is not so much the level of prices as the sharp jump in those prices," Martin Feldstein, a Harvard University economist and president of the private National Bureau of Economic Research, said on Sunday in Washington. "We can we learn to live with oil at US$50 a barrel, but a 30 per cent jump in a couple of months, in the way we have experienced this year, can reduce real incomes, can reduce real profits, and therefore can damage economic activity."

Lowered forecasts

Several chief economists cut their 2005 forecasts in the past month and are less optimistic than the IMF, which on September 29 predicted growth will slow to 4.3 per cent next year from 5 per cent this year, which would be the strongest since 1973. The reduced forecasts for 2005 include 3.9 per cent from Stephen Roach at Morgan Stanley in New York and Jim O'Neill at Goldman Sachs in London, and 3.4 per cent from Norbert Walter at Deutsche Bank AG in Frankfurt.

"It's not all-systems-go any more for the world economy, so people are starting to edge down their forecasts," said Ann Mills, a senior economist at Brown Brothers Harriman in New York.

Mills cut her estimate for world gross domestic product next year to 3.4 per cent from 3.5 per cent in July.

The forecasts suggest the slower growth still may be near the average 3.6 per cent trend of the last decade. Finance ministers and central bankers from the US, UK, France, Germany, Japan, Canada and Italy concluded their meeting on Friday by saying "the outlook for 2005 remains favourable."

No 'complacency'

Any cooling may undermine stock prices and boost bonds, said O'Neill, head of global economic research at Goldman Sachs.

"Bonds are likely to continue to outperform equities," he said.

The benchmark 10-year US Treasury note rose for three of the past four weeks. Energy costs triggered a 1.9 per cent drop in the Morgan Stanley Capital International World Index in the quarter ended September 30, the first drop in six quarters.

The G-7 ministers' statement said "now is not the time for complacency." In addition to asking oil producers for "adequate" supplies, they called for members to improve energy efficiency, for oil markets to improve the flow of information to investors, and for Asian nations to loosen currency pegs to help sustain the expansion.

The IMF, whose separate meeting concluded the next day, issued a statement calling for "stability in oil markets and prices which are consistent with lasting global prosperity." IMF Chief Economist Raghuram Rajan said the "risks to the economy are on the downside partly because of oil."

'Economic headwind'

The IMF estimates that every US$5 a barrel rise in oil prices shaves 0.3 percentage point off global growth. French growth may be 1 percentage point slower at around 1.5 per cent if oil prices remain above US$50, Budget Minister Dominique Bussereau said.

Economic and Fiscal Policy Minister Heizo Takenaka called oil the largest "risk factor" to Japan's expansion.

The world economy "remains uneven and still fragile," UK Chancellor of the Exchequer Gordon Brown said. US Treasury Secretary Snow said oil prices are "causing an economic headwind."

Average US payroll growth in the three months ended August was a third of the prior quarter, hurting consumer spending.

Japan grew at its slowest pace in a year in the second quarter, French joblessness unexpectedly rose in August to 9.9 per cent and German retail sales in the first eight months of the year dropped 1.3 per cent compared with a year earlier.

"Deceleration has already started and a further slowdown is definitely in the cards," said Kathleen Stephansen, director of economic research at Credit Suisse First Boston in New York.

(China Daily 10/05/2004 page7)