The Mayor agree's: High oil equals strong headwinds for US Economy!!

Paulson, Darling Warn on Economy
By LAURENCE NORMAN
July 3, 2008 9:00 a.m.

LONDON -- U.S. Treasury Secretary Henry Paulson ended a four-day European trip Thursday, joining with U.K. Finance Minister Alistair Darling to warn that the near-term economic outlook remains difficult and the global inflation threat is serious.

Days ahead of the Group of Eight leaders meeting in Japan, Mr. Paulson said high oil prices represent a "strong headwind" for the U.S. economy and are likely to prolong its slowdown. His comments came as oil hit a new record, breaching $145 a barrel.

Mr. Paulson said the U.S. economy is facing a "tough" period, with the credit crunch and the housing market's woes also weighing. The U.S. economy grew 0.6% in the first quarter and economists say there is a risk of recession. The economic problems have spread out from the U.S., with the U.K. and euro-zone economies also showing increasing signs of strain.

On Thursday, the European Central Bank raised its key interest rate by a quarter of a percentage point to 4.25% to tame rising inflation, even as growth across the 15-nation euro-zone shows continuing signs of slowing significantly. Markit Economics said the euro-zone services purchasing managers index contracted in June for the first time in five years.

The U.K. services PMI also dropped for the second straight month while data earlier this week showed house prices have fallen sharply on the year and consumer confidence continued to evaporate.

Mr. Darling insisted the U.K. will avoid a recession, although he acknowledged that "the rate of growth will be slower" this year. He also warned that "it's of the utmost importance that we do not allow inflation to become entrenched in the U.K. again." The consumer price index rose 3.3% in May from a year earlier, the biggest increase since 1992.

Mr. Paulson said in an interview with the British Broadcasting Corp. earlier Thursday that while core inflation remained contained in the U.S., inflation had become a "huge problem" globally, especially in emerging economies like Russia and China.

--Adam Bradbery in London and Tom Barkley contributed to this article.

Write to Laurence Norman at laurence.norman@dowjones.com