Booming emerging markets such as China are driving strong global economic growth although surging oil costs pose a risk to the outlook, central bankers from rich and developing countries said on Monday. The global economy is expected to grow around 4 percent this year, a little down from last year as oil depresses the pace of expansion, said European Central Bank President Jean-Claude Trichet, who chaired a meeting of central bankers from Group of 10 nations. "Growth at the global level is certainly confirmed," he said. "Emerging economies as a whole, and China is an emerging economy with a great magnitude, are contributing very significantly to growth."
China's red-hot economy is proving a mixed blessing. The Asian giant has become a major factor on global markets as it sucks in imports to manufacture cheap exports, but its voracious demand for commodities has pushed oil prices above $50, risking the growth outlook for oil-dependent industrialised nations.
"It is absolutely true that all things being equal, the price of oil around $50 has a depressing effect, had a depressing effect on the global economy," Trichet said.
Central bankers also are keeping a close eye on widening bond spreads in corporate and credit markets from their extraordinarily low levels. So far it appears to reflect a better pricing of risk, Trichet said.
"It is guided very much by fundamentals and is not guided by a contagion... This phenomenon needs close observation," he said. As for inflation expectations, they appear well under control, he added.
As US interest rates rise and the economic recovery matures, investors have started to differentiate more in pricing risk in bond markets. Unusually tight yield spreads were a worry for central bankers in case investors flooded out of bond markets en masse, causing a disruptive correction.
The G10's growth outlook is in line with the International Monetary Fund forecast for the world economy to expand by 4.3 percent this year. That is down from 2004's robust 5.1 percent GDP growth, the fastest in three decades, but still well above its 20 year average.
OIL AND CHINA: This robust growth has powered a huge appetite for oil and other commodities from the Chinese economy - which grew at a 9.5 percent annual rate in the first quarter - and from other emerging nations. Crude oil costs have risen over 50 percent in the past year, robbing developed countries of spending power.
Central bankers cited this as a risk to the global economy and welcomed news that Saudi Arabia would pump as much oil as needed to help meet demand. "We consider it goes in a very good direction," Trichet said.
He declined to discuss China beyond noting its importance to global growth. Leaders of the world's sixth largest economy are under intense pressure to loosen China's fixed currency regime to help with rebalancing global economic growth. Washington complains that the pegged yuan currency is undervalued, giving its exports an unfair advantage.
Trichet merely said the G10 was sticking with calls from the Group of Seven rich nations in its statements on the need for more flexibility in exchange rates.
Before the G10 meeting on the global outlook several officials, including China's deputy central bank governor, said that China's overheated economy was poised for a smooth and gradual slowdown. A cooling off is needed to prevent inflation from building in China and to reduce stresses on world growth.
"I think the Chinese economy has been performing well, and the growth rate and inflation and other indicators of the Chinese economy have been going smoothly," said Li Ruogu, deputy governor at the People's Bank of China.
Bank of Japan Governor Toshihiko Fukui said a flexible Chinese yuan currency would not be a quick fix for a global economy facing large trade imbalances and polarised growth patterns. A better regulatory system also is needed, he said.
China raised official interest rates last October, tightened up bank lending and is cleaning up bank balance sheets, while the government is starting to reduce fiscal stimulus as it modernises its economy.
In Washington, Chinese and US officials were due to meet on Monday and foreign exchange issues were on the agenda.
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