The latest Group of Twenty (G20) summit in China delivered plenty of promises, but not much evidence that the grouping will achieve its stated growth targets. After the pledges of 2014, getting the world economy back on track now appears a herculean task.
From the public row over U.S. President Barack Obama’s arrival at Hangzhou airport, to worries over Britain’s exit from the Eurozone and an apparently frosty exchange between the U.S. leader and Russian President Vladimir Putin, the summit exposed more differences than shared purpose.
The G20 leaders’ 48-point communique showed a sense of exasperation over past reform failures, noting that “growth is still weaker than desirable” with downside risks due to “potential volatility in the financial markets, fluctuations of commodity prices, sluggish trade and investment, and slow productivity and employment growth.” It also pointed to “challenges” from geopolitical developments, refugee flows, terrorism, and conflicts.
In response to these challenges, the G20 leaders pledged greater integration, openness, and inclusiveness, using “all policy tools,” as well as “swift and full implementation of the growth strategies” pledged at the 2014 Brisbane summit. They also vowed increased innovation and support for structural reform, while stating opposition to “protectionism on trade and investment in all its forms.”
To counteract excess capacity in industries such as steel, the G20 pledged a “Global Forum on steel excess capacity” along with enhanced communication and cooperation. On Brexit, the grouping said “in the future, we hope to see [Britain] as a close partner of the [European Union].”
Yet it was with an apparent sense of déjà vu that the Organization for Economic Cooperation and Development (OECD) again warned the G20 leaders over the state of the global economy.
After having said in 2014 that the world economy could sink into a “low-growth trap” without reform, the Paris-based grouping used identical wording after the Hangzhou summit.
“The global economy remains stuck in a low-growth trap,” OECD Secretary-General Angel Gurria said in a statement Monday.
“Eight years after the start of the crisis unemployment and inequality remain high. Growth in wages and productivity is weak while trade and investment is low. Despite a 2014 G20 commitment – monitored by the OECD and IMF [International Monetary Fund] – to raise global [gross domestic product] by an additional 2 percent by 2018, measures implemented so far will only add around 1 percent.”
Gurria urged full implementation of the G20 nations’ growth commitments, including structural reforms “to promote product market competition, skills upgrading, labor mobility, and financial market robustness,” with the aim of boosting productivity and bolstering “long-term, inclusive growth.”
In August, the OECD announced that GDP growth among its 35 member economies had slowed to just 0.3 percent in the second quarter of 2016, down from 0.4 percent in the previous quarter. Among the major economies, only Britain and the United States improved, while Japan stood still after having grown by 0.5 percent in the previous quarter.
Year-on-year GDP growth for the OECD area fell to just 1.6 percent, decreasing for the fourth straight quarter to its slowest speed since 2013.
Globally, the IMF expects only 3.1 percent world growth this year and 3.4 percent in 2017, blaming in its latest July update the effects of Brexit, along with “political divisions within advanced economies,” geopolitical tensions and terrorism. Among the G20, the Washington-based institution sees India posting the fastest expansion in 2016 at 7.4 percent, ahead of China’s 6.6 percent and the 6.4 percent predicted for emerging and developing Asia.
Meanwhile, Japan is expected to expand by just 0.3 percent this year, while the Eurozone is seen growing by 1.6 percent and the United States by 2.2 percent.
Economist Mohamed A. El-Erian said the G20 communique “gives the impression that world leaders recognize that they could be losing the battle against forces that would undermine longstanding drivers of growth and prosperity, including trade and investment openness.”
However, he wrote in Bloomberg View that few expected the G20 – “or any other global meeting’ – could influence current nationalistic public agendas.
“Most advanced economies are dealing with anti-establishment movements that disrupt traditional political arrangements and make it harder to reach agreement on economic governance issues,” he said. He pointed to political polarization in the United States, electoral troubles in Germany, Italy, and Spain, and the emerging consequences of Brexit as among the list of concerns.
“Frustrated by years of low growth whose meager benefits have accrued primarily to the best-off segments of society, anti-establishment movements are capitalizing on the vocal anger and dissatisfaction of the electorate. How better to fuel this anger then to also blame other countries and immigrants?” he asked.
“Watching this paralysis, very few emerging economies have the willingness and ability to move forward on their own — and for good reasons. Many of the mentioned policy steps require coordinated action; and some of the measures that can be carried out without such coordination, individual action could end up being counterproductive.”
According to El-Erian, most previous G20 meetings were “heavier on photo opportunities than on policy follow-through,” with the absence of crisis conditions making it harder to “focus minds and secure the cooperation of national politicians” instead of empty words.
IMF Managing Director Christine Lagarde warned before the summit that 2016 would mark the fifth straight year with global GDP growth below its long-term average of 3.7 percent, “and 2017 may well be the sixth.”
She blamed crisis legacies, weak demand, and adverse demographics in the advanced economies, while emerging economies faced headwinds from a “rebalancing” of the Chinese economy and the related decline in commodity prices.
“Weak global growth that interacts with rising inequality is feeding a political climate in which reforms stall and countries resort to inward-looking policies,” Lagarde said.
The IMF boss called for greater fiscal spending, increased structural reform, reduced trade barriers and stronger social safety nets as part of a “global growth agenda” to get the world economy back on track.
“Inaction risks reversing global economic integration, and therefore stalling an engine that, for decades, has created and spread wealth around the globe. This risk is, in my view, too large to take,” Lagarde said.
In 2015, global trade grew by just 2 percent, while an average of 80 new restrictive measures on trade have been adopted each year since the 2008 global financial crisis, according to the G20’s business grouping, B20.
Despite the Brisbane summit pledges of more than 1,000 reform initiatives to boost growth, the world economy is actually now expected to be $4 trillion smaller in 2018 compared to its 2013 baseline, instead of the $2 trillion boost expected. Even former host nation Australia has backpedaled on many reform promises, according to analysis by the Australian National University.
“The Brisbane goals seem out of reach,” was the conclusion offered by the Australian Financial Review.
With the clock ticking on the 2018 targets, the G20 leaders are fast running out of time to deliver a much-needed boost to the world economy. Next year’s summit in Germany could prove the last chance.