The mood in Washington during last weekend's IMF-World Bank annual meetings was gloomy. As the Brazilian Finance Minister put it, the global economic recovery continued to create a sense of disillusionment.
The IMF lowered its forecast for global growth for the third time this year, a pattern it has followed in the past three years. The IMF chief economist summed up the outlook as involving 'legacies, clouds and uncertainties'. He warned that the downside risks had increased, coming from complacent financial markets, rising geopolitical tensions and the prospect of the euro area going back into recession.
The IMF Managing Director described the global economic recovery as 'brittle, uneven and beset by risks', and warned that the world could get stuck for some time with a 'mediocre' level of growth.
The mood was reflected in the headlines. The New York Times referred to a 'global economic malaise', noting that large parts of the world seemed to be on the verge of recession. The Financial Express in India said the global economy was in an 'unstable equilibrium' . It referred to the IMF's recent Global Financial Stability Report, which included the warning: 'market and liquidity risk have increased to levels that could compromise financial stability if left unaddressed'.
The topics being discussed at the many seminars that take place in the margins of the meetings added to the sense of concern, with a common theme being whether there was secular stagnation, with countries growing well below their potential growth rates for an extended period. Adding to the gloom was the sharp fall in global shares as investor fears deepened over prospects for the global economy. Then there was the Ebola crisis.
Against this background, Treasurer Hockey was a rare beacon of optimism. [fold]
He chaired the final meeting of G20 finance ministers under the Australian presidency and commented that while there was a lot of talk about economic challenges and renewed weakness, 'we emerged with optimism'. He said the growth strategies members had submitted to date (which will be released at the Brisbane Summit) will if implemented increase global growth by an extra 1.8% over five years. Hockey said that between now and Brisbane, G20 members would continue to work hard to identify new measures which will achieve the 2% target set in February this year.
The renewed concern over the global economy certainly highlighted the need for concerted policy action by the major economies. But developments over the course of 2014 have also demonstrated how difficult it will be for G20 members to achieve the 2% target.
Technically, the G20 now has to meet the growth target over the next four years. The commitment made at the February 2014 meeting was to raise global growth by a cumulative additional 2% by 2018. Come the Brisbane Summit, nearly a year will have have passed from when the target was set, and over that period global growth had eased rather then strengthened. So over the next four years global growth will have to be more than 2% to achieve the original commitment.
More importantly, the major economies will all have to pick up momentum if an additional $2 trillion is to be added to the global economy over the next four years. The US cannot be the sole growth engine. China's challenge, as the IMF notes, is to negotiate the end of its housing and credit boom. China's rebalancing is likely to imply a modest slowing rather than acceleration in its growth.
For the G20's target to be achieved, Europe will have to finally get its act together. Again, Hockey was optimistic, saying Europe was developing action plans to meet its challenges. But Larry Summers was pessimistic, saying Europe was unlikely to turn around anytime soon. The New York Times editorial said many finance ministers and central bankers who met in Washington are 'unwilling or ill prepared' to respond. The paper noted that in Europe, Germany continues to insist on restrictive fiscal rules and is trying to prevent the European Central Bank from buying government bonds. These tensions were evident in the statements various ministers made at the IMF meetings. Japan has the challenge of advancing more forcefully the 'third arrow' of Abenomics, namely structural reforms, particularly those aimed at increasing labour supply.
The WTO Director General reminded everyone that global trade growth has been disappointing and if it was to return to pre-crisis levels, trade had to make a more positive contribution. He saw new multilateral trade liberalisation as the answer, but did not appear to be too hopeful that a breakthrough was imminent.
The global economy certainly remains fragile and the risks are many. The task of lifting growth and dealing with the legacies of the crisis is large. It is easy to be cynical about the G20 growth target. However, the G20 remains the main forum trying to prevent the world entering a period of prolonged low growth. At least there is one source for optimism.
Photo by Flickr user sfgamchick.