Can China Revive the G20?
Shanghai will welcome finance ministers and central bank governors for the first major meeting of China's G20 presidency at the end of this week. It should be an instructive meeting for a variety of reasons.
As I point out in the latest G20 Monitor, the global economy continues to face significant short and long-term challenges. This year is likely to be characterized by disappointing growth and persistently high unemployment. The IMF predicts that the global economy will grow at 3.4 percent in 2016, while the OECD just downgraded its 2016 growth forecast from 3.3 percent to 3 percent.
G20 policymakers will be familiar with these preconditions of sluggish, uneven economic growth and mounting risks; these were the same sorts of challenges that influenced the start of Australia’s 2014 presidency and the Turkish 2015 presidency. That said, there seems to be less room for complacency this time around. A crisis seems a more realistic prospect than it was a year ago. What’s more, a repeat of the downward revision of the 0.75–1 percentage point magnitude made in recent years would, to some, be a reflection of global recession (although what constitutes a global recession makes for an fun ongoing debate among technocrats).
The main substantive question for the world going into Shanghai will therefore be: will policymakers agree with the IMF, which has been calling for increased urgency in raising actual and potential output through a mix of demand support (in countries where there is fiscal space) and structural reform?
A related point of interest will be the treatment of the mix of policy settings between monetary and fiscal policy. In Ankara last September, G20 Finance Ministers and Central Bank Governors recognized that monetary policy alone cannot lead to balanced growth.
Yet the global policy mix has, if anything, tilted more towards monetary policy over the past six months. Since the U.S. Federal Reserve lifted interest rates in a much-anticipated move last December, all the action has been the other way. The Bank of Japan has launched negative interest rates and the European Central Bank is on course for more aggressive monetary easing. Speculation is rising about further monetary policy easing across multiple G20 nations. This could have consequences for longer-term financial stability.
A crucial way to take pressure off central banks is for fiscal policy to take up more of the slack. Former U.S. Treasury Secretary Robert Rubin argues that the fundamental question for the globe’s economic future is whether elected leaders around the globe, primarily legislators, will finally move forward on fiscal issues, public investment, and structural reform. The G20 needs to demonstrate more political will.
The G20’s preoccupation for structural reforms in recent years has run up against Jean-Claude Juncker’s famous refrain that “We all know what to do, we just don't know how to get re-elected after we've done it.” So it seems that part of the solution may need to be for further demand support from countries that have the fiscal space, a topic that has been highly challenging in the G20 context, given that in recent years G20 members have been unwilling to explore fiscal stimulus because they were fixated with fixing their budget and debt positions.
Estimates of fiscal space are highly contestable, although the first chart in a recent IMF staff discussion note provides an interesting indicator of the relative fiscal position of various countries, and the authors (Ostry, Ghosh and Espinoza) argue that reducing debt in the grey area below is likely to be normatively undesirable as the costs involved would be larger than the resulting benefits.
There are also challenges for Chinese domestic economic policymaking and these loom large in the known risks to the global economy in 2016. People’s Bank Of China Governor Zhou has recently taken the welcome step of publicly outlining the Chinese approach to the management of its exchange rate.