To suggest that this weekend’s heads of government summit of the Group of 20 leading nations will not come up to expectation is, if anything, giving it too much credit. Despite a great deal of rhetoric over the years, the G20 has proved too unwieldy, and its agenda overloaded with too many items, to function well as a decision-making forum. Expectations about what the gathering can achieve have been steadily ratcheted down.
Still, the meeting brings into focus events in the global economy, where China, the summit’s host, has been performing better than feared but not well enough to pull along the rest of the world. With the pace of growth in the advanced economies tepid rather than scorching, much of the effort of bridging the gap is being left to other emerging market nations. Their ability to do so, as among the rich economies, will rely on those countries with fiscal and current account space using it to provide stimulus.
China has for years tried to pull off the trick of being treated as a first-rank nation without accepting primary responsibility for politically difficult actions — whether this is combating climate change, reducing overcapacity in manufacturing or managing its exchange rate in the global interest. Beijing’s aim this weekend will be to spread responsibility for boosting global growth to other countries and emphasise the need for structural reform elsewhere.
To be fair, China itself looks less of a problem to the world economy than it did when it took over the G20 presidency at the turn of the year. Then, worries over capital flight and downward pressure on the renminbi provoked general alarm in risk assets, particularly in other emerging economies, and appeared to be a clear and present danger to growth in the short run. Since then, calm has returned to financial markets, which have also shrugged off the threat arising from the UK’s vote to leave the EU in the Brexit referendum. Perhaps because the People’s Bank of China has become a little more transparent about its policy regime for the renminbi, the slide of about 7 per cent in the Chinese currency on a trade-weighted basis since the beginning of the year has not provoked much reaction from international investors or indeed politicians.
China posted growth of 6.7 per cent in the second quarter. Gratifyingly, the expansion relied relatively heavily on household consumption, suggesting that the long-awaited rebalancing of China’s growth pattern in a way more conducive to reduce global imbalances is at least partially under way. At the same time, growth that is notably slower than the double-digit percentage rates of years past will contribute less to global expansion and leave the Chinese economy vulnerable to the huge debt burden that its corporates have acquired.
In that context, it is more important than ever that other large surplus economies, not just Germany but also Asian countries such as South Korea, use the fiscal space they have to boost global demand and reduce their current account imbalances.
The global economy is in better shape than when China began its presidency. But while the acute problems of financial market turmoil and threats to confidence have receded, the chronic issues of insufficient global demand and apparent falls in trend growth continue. This weekend’s meeting of heads of government might not provide the answers. However, those leaders should not conclude that the lack of immediate crisis means policy is doing its job and there is no need for their sights to be set higher. – Financial Times