The IMF’s coordination plea fell on deaf ears as finance ministers from the 20 largest economies failed to agree on a strategy for growth.
Last week, G20 finance ministers and central bankers gathered in Shanghai to seek a coordinated response to stimulate global growth. Not surprisingly, little resulted from the meeting.
The International Monetary Fund (IMF) made its hopes clear before the gathering in China, where the G20 summit will take place in September, calling on the major economies to be “bold” and join forces to boost growth. The IMF’s desperate cry came as market turbulence continues to hurt growth, notably with faltering oil prices.
In a briefing note issued before the Shanghai meeting, the IMF called for governments and central banks to take “multilateral actions to boost growth and contain risk.” To counter these challenges, the G20 economies all need to be “using available fiscal space to boost public investment and complement structural reforms.”
Hopes for Chinese reform
When it comes to reform, this year’s G20 host is in the spotlight. Chinese trading was forced to stop after rapid sell-off in January, triggering a shaky start to 2016 for global markets. Given the centrality of China, a slowing Chinese economy is increasingly concerning governments and central banks across the world. China’s central banker, Zhou Xiaochuan, has sought to address these worries by assuring investors that China would not devalue the Renminbi and will continue to reform its economy, which the World Bank called “distorted” last year.
But words are cheap. The world awaits what China’s economic reform package will look like. Investors got a glimpse of the direction during the ‘Two Sessions’ policy address by Premier Li Keqiang, which took place shortly after the Shanghai meeting. Growth rate has been further cut from 7% to 6.5%, as the government constrains stimulus and switches its focus to reforms.
However, even if China promises to double down on its stimulus, the aspiration of coordination by the IMF seems unthinkable at this stage. The IMF’s position is that risk of ‘leakage’ – that stimulus money will be spent by consumers on imported goods (especially in the case of China) – could be ameliorated if all the major economies acted together. The issue is that not every government believes in the impact of these stimulus packages, especially if their voters favour tighter fiscal control. With governments responding to different needs domestically, the IMF’s goal of coordination looks like a utopia far, far away.
Looking ahead to September
The negative interest rate strategy by the Bank of Japan reflects such instincts, as the BoJ moves to boost Japanese export, perhaps at the expense of others. As the Governor of the Bank of England, Mark Carney, puts it, “For the world as a whole, this export of excess saving and transfer of demand weakness elsewhere is ultimately a zero-sum game.”
When the G20 convenes again this autumn, world leaders will meet in the beautiful and historic city of Hangzhou, two hours away from Shanghai on China’s fast growing high-speed rail. Time for sceneries will be limited though, as the urgency to act will only be greater then.
Domestic concerns have trumped coordination for mutual benefits in Shanghai. If leaders fail to buckle this trend in Hangzhou, they could soon be fulfilling Ian Bremmer’s prophecy that “20 is just too many” to reach any agreement. Emerging markets have domestic concerns different to those of developed economies, a trend likely to continue as the likes of China, India, and Indonesia rise. New and different players, coupled with divisions within the developed world in a low-growth era, will make future agreements even more difficult in the future.
The future of the G20 is hanging in the balance. Whether or not the forum survives, its meaning is lost if countries cannot work together on the group’s most important issue: the global economy. In such a setting, investors and foreign policymakers alike should expect less common responses, and watch for individual countries devising their own strategy.
A G-Zero world may beckon sooner than expected. All eyes are on the summit in Hangzhou this September.
