Thursday, June 12, 2008

G-8 Seeks to Aid Growth as Oil Focuses Central Banks on Prices

By Simon Kennedy

June 13 (Bloomberg) -- The world's most powerful governments are looking for ways to boost economic growth to compensate for record oil prices, just as central bankers gird for an inflation fight.

French President Nicolas Sarkozy wants to cap value-added taxes on fuel, the U.K. is cutting taxes for energy producers and Japan is helping truckers. Italy is threatening a levy on oil companies, while in the U.S., Democratic presidential candidate Barack Obama is calling for a second economic stimulus package.

Finance ministers from Group of Eight countries gather in Osaka today and tomorrow after the price of crude oil doubled in the past year to reach a record $139.12 on June 6. While they try to stave off a global recession, central bankers are turning their attention to quashing price increases after 10 months of defending the expansion from a credit squeeze.

``Inflation means central banks aren't in a position to provide great relief to growth,'' said David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York. ``There's going to be mounting pressure on governments to respond decisively.''

The International Monetary Fund in April predicted advanced economies this year will suffer their fastest price gains since 1995 and their weakest expansion in seven years. The World Bank said June 10 that global growth will slow a percentage point to 2.7 percent in 2008.

Bernanke Signal

Federal Reserve Chairman Ben S. Bernanke on June 9 delivered his clearest message yet that the central bank is done lowering interest rates after 3.25 percentage points of cuts since September, saying officials will ``strongly resist'' any surge in inflation expectations. European Central Bank President Jean-Claude Trichet said June 5 he may raise rates in July.

``What was a threat about half a year ago now appears to have become a reality -- stagflation,'' said Joachim Fels, co- chief economist at Morgan Stanley in London.

That leaves it to politicians to defend growth, and their own political standing, as U.K. motorcyclists and French taxi drivers protest rising fuel bills and consumers bemoan falling purchasing power.

`Very Worried'

``Governments are very worried about the impact of inflation economically and politically,'' said Klaus Baader, chief European economist at Merrill Lynch & Co. in London. ``They're going to take more and more compensatory action.''

Ed Gillespie, President George W. Bush's counselor, said June 6 the U.S. is ``constantly looking at options and proposals'' even after it began mailing more than $100 billion in tax-rebate checks. Four days later, Keith Hennessey, director of the White House National Economic Council, said the Bush administration is opposed to another stimulus package.

U.K. Prime Minister Gordon Brown last month relaxed taxes on some North Sea oil production sites in an effort to lift output and is facing calls to delay an increase in fuel duties and reverse a doubling of taxes for some cars.

Sarkozy is renewing energy-tax rebates for farmers and has proposed cutting the VAT on fuel, ignoring opposition from neighbors in the European Union.

Italian Prime Minister Silvio Berlusconi plans ``targeted'' tax cuts on fuels while Finance Minister Giulio Tremonti last week suggested oil companies be forced to pay a ``Robin Hood'' tax with the revenues being passed to households.

Temporary Relief

Meantime, the Japanese government is spending 215 billion yen ($1.9 billion) through March on easing the burden of higher oil costs on small and midsized enterprises. For trucking businesses, the discount for overnight highway tolls was raised to 40 percent from 30 percent.

While such measures may provide temporary relief, they might also exacerbate the inflation threat by reinforcing energy demand. A windfall tax could also deter companies from investing in exploration.

``Tax policies are not an appropriate means to counter commodity-price increases,'' Trichet said June 5. ``This would send the wrong signals to producers and consumers alike.''

Some G-8 politicians agree. German Finance Minister Peer Steinbrueck, who is not traveling to Osaka, said June 2 that governments shouldn't ``react politically and try to intervene'' to tame oil prices.

Past Failures

That means that as a group, the G-8 may shy away from backing coordinated fiscal responses, instead resorting to repeating past demands that petroleum producers pump more oil and consuming countries become more efficient.

That approach has so far proved unsuccessful. When it was adopted at a May 2004 meeting in New York, oil cost about $40 a barrel. Saudi Arabian Oil Minister Ali al-Naimi on June 9 rejected demands for higher output.

Geoffrey Yu, a currency strategist at UBS AG in Zurich, said the G-8 may also express concern that the falling dollar is fanning inflation. The G-8 ministers have refrained from making a joint comment on exchange rates for two decades as central bankers aren't present at the talks. A Canadian official said June 9 that currencies would not be a major topic.

``It's hard to talk about commodity prices and not the dollar,'' Yu said. Paulson told Bloomberg Television on June 10 that he would tell his counterparts that ``strong'' economic fundamentals will be reflected in the dollar.

The G-8 is composed of the U.S., Japan, Germany, Russia, U.K., Italy, Canada and France.

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