Finance ministers and central bank governors of the leading industrial countries warned at the weekend of economic disruption from high oil prices and vulnerabilities in financial markets.
The mood at the International Monetary Fund and World Bank annual meetings was downbeat, with senior politicians and officials airing their fears that global economic expansion may have peaked and more challenging times lie ahead.
Jean-Claude Trichet, president of the European Central Bank, said high oil prices were having a "very significant impact" on growth and inflation.
The communique of the International Monetary and Financial Committee - the ministerial board overseeing the IMF - said: "Global growth is expected to continue, although downside risks to the outlook have increased, especially high and volatile oil prices, recently exacerbated by the effects of Hurricane Katrina, increasing protectionist sentiment and the possibility of tighter financial market conditions".
A senior US Treasury official said that low market interest rates and narrow credit spreads were a big focus when the group of seven leading economies met. "We freely acknowledged the things that we worry about. Do interest rates appropriately reflect the risks?" he said.
Private sector financial institutions shared the concern of officials about credit markets.
William Rhodes, vice-chairman of the Institute of International Finance and vice-chairman of Citigroup, said low bond spreads were indicative of high market liquidity and investors seeking in more risky areas.
The other main concern maker was the continued rise of global imbalances, driven by a surge in China's trade surplus. Kristin Forbes, professor at MIT and former economic adviser to President George W. Bush, said time might be running out to deal with imbalanced trade between the US, Asia and oil exporters. "I am concerned that the past few weeks have pushed us closer to the tipping point on global imbalances," she said. "Leaders and investors have become too complacent on the risks involved."
Zhou Xiaochuan, the governor of the People's Bank of China, told bankers that China would stick to a policy of gradual, rather than rapid change in its currency arrangements.
He said China's surging trade surplus was not caused by currency mis-alignments, but by uncertainties among Chinese consumers, limiting the growth of consumption and imports. He criticised the many papers circulating in Washington that analysed China's trade imbalances.
Speaking about the IMF surveillance programme, he said: "Surveillance to me is like a doctor - looking at a patient to find out the problem - but this doctor is only responsible for diagnosis and not responsible for giving you a syrup. As a patient, you need a diagnosis, but you also need a syrup".
Gerard Lyons, chief economist at Standard Chartered, said the global economic cycle had peaked, citing rising interest rates, potentially slower growth in the US and China and the fact that Japan and the euro zone are not placed to take up the slack.
"The next six months will be a challenging time, dealing with the high oil price, and global imbalances loom. The global economy has peaked and liquidity conditions are set to tighten. When things turn around you can have significant fallout."
