G-8 meets as economy storm clouds thicken

Between surging oil prices, food inflation and a credit crunch that has depressed global growth, leaders from the Group of Eight economic powers face the gravest combination of economic woes in at least a decade when they gather next week.

The outlook has darkened dramatically since last year's summit in Germany, when the leaders declared the global economy was in “good condition” and oil cost $70 a barrel – which seemed high at the time.

Since then, the U.S. subprime mortgage crisis has erupted, roiling markets and battering major financial firms. Oil has doubled to above $140 and food prices have jumped, hurting the poor in particular and raising the threat of political instability.

“Things have changed for the worse across the board,” said Robert Hormats, vice chairman at Goldman Sachs (International) Corp. in New York.

Hormats argues that the economic problems now are more serious and widespread than during the Asian financial crisis of 1997-98, where the pain was largely limited to emerging markets.

“Now you have a financial disorder where the epicenter is the U.S.,” he said. And fuel and food inflation “are serious matters that affect large numbers of people.”

Host Japan had put global warming atop the summit's agenda, but the dilemma of how to respond to accelerating inflation and slowing global economic growth could grab the spotlight.

Prime Minister Yasuo Fukuda has said he hopes the meeting – Monday through Wednesday at a hot springs resort on Hokkaido, Japan's northern island – will “show some direction” in tackling oil and food prices but stressed it is only “one step” in a longer process.

On oil, analysts are skeptical that the G-8 leaders – representing the U.S., Japan, Britain, France, Germany, Russia, Italy and Canada – will come up with much beyond urging major petroleum producers to boost output, reiterating the message of their finance ministers, who met last month in Osaka.

Foreshadowing possible disagreement among the leaders, the finance ministers were divided on where to assign blame for the run-up in oil prices. Germany, France and Italy held speculators largely accountable, while the U.S. and Britain said the focus needs to be on boosting production capacity that has barely kept up with growing global demand.