World economy faces downside risks: G7 draft statement

TOKYO (Reuters) - The world economy is vulnerable to a deeper slump in the U.S. housing market, tighter credit conditions and high oil and commodity prices, according to a draft copy of a G7 communique obtained by Reuters.

Finance leaders from the Group of Seven industrialised nations also called on world oil exporters to step up production as high prices stoke inflation.

The draft did not contain any proposed wording on foreign exchange rates, which G7 finance officials were discussing in their meetings on Saturday.

“Downside risks still persist, which include further deterioration of the U.S. residential housing markets; tighter credit conditions from prolonged difficulties in the financial markets; high oil and commodity prices; and heightened inflation expectations in some countries,” the draft G7 statement read.

The finance leaders urged oil exporters to raise production, saying that high oil prices stemmed largely from rising world demand, but also geopolitical concerns.

The G7 in its October statement made no reference to oil production and previously had only spoken of the need to increase refinery capacity and energy efficiency.

Since then, oil prices briefly topped $100 per barrel last month, pushing global inflation uncomfortably high and complicating matters for central bankers trying to prop up economic growth without stoking further price pressure.

Oil has since retreated to around $90 a barrel on concerns a slowing economy would dent demand, although supply disruptions and a forecast U.S. cold snap saw prices vault 4 percent on Friday to $91.77 a barrel.

Finance ministers, keen to show a united front in the face of a weakening global economy, acknowledged that growth was likely to slow, and risks were skewed to the downside.

As reported by Reuters earlier, the draft statement also acknowledged a “more challenging and uncertain” global economic outlook than when the G7 finance ministers last met in October.

“We will continue to watch developments closely and take appropriate actions, individually and collectively, in order to secure stability and growth in our economies,” the communique read.

The finance leaders called on financial firms to promptly disclose losses they may have incurred and reinforce their capital base.

While banks have announced more than $100 billion(51.3 billion pounds) in writedowns tied primarily to the U.S. subprime mortgage mess, more is likely to come, particularly from European banks. Many have been slower than their American counterparts to fully recognise and report losses.

The communique also stressed the need for unified action to address global climate change following December’s climate talks in Bali, Indonesia, where officials agreed to two years of negotiations to reach a deal to succeed the Kyoto Protocol.

“We will seek to enhance the critical roles played by international financial institutions and the private sector in reducing greenhouse gas emissions. Market-based policies, which could include taxes and emission trading, will become increasingly important in combating climate change.”

An eagerly awaited section on foreign exchange issues remained blank as finance leaders wrangled over the wording. A G7 source told Reuters on Saturday that the wording in the communique would be roughly in line with previous comments that put pressure on China to allow its yuan currency to appreciate more quickly.

Reporting by Gernot Heller; Writing by Emily Kaiser