Page last updated at 14:21 GMT, Sunday, 6 July 2008 15:21 UK

G8 to focus on food, fuel and finances

By Andrew Walker
Economics correspondent, BBC World Service, Hokkaido, Japan

US and Japanese leaders meet before G8 summit in Japan
The G8 leaders will have plenty to discuss in coming days

These events used to be economic summits. Leaders from the world's major developed countries got together to discuss economic problems - and there were plenty when the summits started at Rambouillet in France in 1975 in the wake of the first of the modern oil crises.

Although these days G8 summits cover almost anything that is bothering the leaders, this year the economy has made an unwelcome bid to reclaim its traditional starring role.

Think back for a moment to how things looked a year ago.

The US economy was doing very nicely. Inflation seemed reasonably subdued, and crude oil was $70 a barrel. That was far from cheap, but oil importing countries seemed to be coping well enough. And as for sub-prime mortgages, plenty of people had never heard the term.

A year later and how the situation has changed.

New York Stock Exchange
The US sub-prime crisis sparked major global economic jitters

Oil prices have doubled and food is more expensive, inflation is once again giving central bankers sleepless nights, and sub-prime mortgages have given us a global credit crisis.

Most economies are still growing. But in many, growth has slowed. In some there are concerns that it might stop altogether for a time.

There were hopes a few months ago that the worst of the credit crisis might be over, that the banks had revealed the bulk of the losses they have sustained because of homeowners and other borrowers failing to keep up loan repayments.

Perhaps that will turn out to the case. But the remarkable increase in the cost of oil - and food - adds a new economic danger.

Action plan

So what can the G8 political leaders do?

The main tool for tackling slower growth and inflation is interest rates and that policy is largely in the hands of central banks not political leaders.

G8 leaders can boost government spending or cut taxes, as President Bush has done. But others have weak public finances already and little room for manoeuvre.

They can also talk about better regulation, with more coordination between countries. And they could tell the banks to behave themselves - take more care when they lend and raise more capital to repair their finances, as many have been doing.

Energy fix

Filling petrol
Oil prices hit a record $146 a barrel last week

As for fuel prices, the options for a short-term fix are limited. If it really is true, as some in G8 countries believe, that speculation is the cause, then presumably the speculative bubble will eventually burst and oil will become cheaper.

But if it is in fact due to so-called fundamentals - rising demand with supply barely keeping pace - then it's more difficult. Then it would probably take weaker demand to bring the price down.

There are some signs of that happening especially in the US where there is growing interest in fuel-efficient cars.

But just as important is what happens outside the G8, in developing countries that control and subsidise fuel prices.

Some have started allowing the prices paid by consumers to rise. If many other countries follow suit, it is likely to affect demand and could in time reduce the international price of oil.

G8 governments tax fuel and could ease the pain for their own people by cutting those taxes, but that would weaken the effect on demand.

The G8 could call for more investment by oil producers and for more effort to make us less dependent on oil, but that would take years to have an impact on the price.

Stockpiles

Vendors sell vegetables at a market in Allahabad, India
Surging food costs have added to the world's economic woes

On the food price crisis there are reports that the summit will discuss a new system of food reserves to reduce the risk of future price escalations.

The G8 leaders are sure to say something about the negotiations underway in the World Trade Organisation (WTO) to reduce barriers to global commerce.

There will be another attempt to get an outline deal later this month at WTO headquarters in Geneva. The talks have been going in fits and starts since 2001, with many missed deadlines.

It has become almost a ritual but the G8 leaders will no doubt say a deal should be done. But it will only happen if they - less Russia which is not a WTO member - and other countries make concessions they have been unwilling to give so far.


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