There is a lot of pessimism around about the state of the global economy and the prospects for more sustained growth. Stock markets have been turbulent; oil and other commodity prices have fallen; inflation has been below central bank targets in most countries; and growth has declined in many countries, most worryingly in China.
The latest worry, expressed by finance ministers at the G20 conference in Shanghai, is that UK exit from the EU could have a negative impact on economic growth, not just for the UK, but for the global economy generally.
But is this pessimism justified? In an interesting article in the Independent, Hamish McRae argues that there are five signs that the world economy is not doomed yet! These are:
||There are more monetary and fiscal measures that can still be taken to boost aggregate demand.
||Despite some slowing of economic growth, there is no sign of a global recession in the offing.
||US and UK growth are relatively buoyant, with consumer demand ‘driving the economy forward’.
||Deflation worries are too great, especially when lower prices are caused by lower commodity prices. These lower costs should act to stimulate demand as consumers have more real purchasing power.
||Inflation may start to edge upwards over the coming months and this will help to increase confidence as it will be taken as a sign that demand is recovering.
So, according to McRae, there are five things we should look for to check on whether the global economy is recovering. He itemises these at the end of the article. But are these the only things we should look for?
Five signs that the world economy is not doomed yet Independent, Hamish McRae (27/2/15)
- What reasons are there to think that the world will grow more strongly in 2016 than in 2015?
- What reasons are there to think that the world will grow less strongly in 2016 than in 2015?
- Distinguish between leading and lagging indicators of economic growth.
- Do you agree with McRae’s choice of five indicators of whether the world economy is likely to grow more strongly?
- What indicators would you add to his list?
- Give some examples of ‘economic shocks’ that could upset predictions of economic growth rates. Explain their effect.
Here are two thought-provoking articles from The Guardian. They look at macroeconomic policy failures and at the likely consequences.
In first article, Larry Elliott, the Guardian’s Economics Editor, argues that Keynesian expansionary fiscal and monetary policy by the USA has allowed it to achieve much more rapid recovery than Europe, which, by contrast, has chosen to follow fiscal austerity policies and only recently mildly expansionary monetary policy through a belated QE programme.
In the UK, the recovery has been more significant than in the eurozone because of the expansionary monetary policies pursued by the Bank of England in its quantitative easing programme. ‘And when it came to fiscal policy, George Osborne quietly abandoned his original deficit reduction targets when the deleterious impact of an over-aggressive austerity strategy became apparent.’
So, according to Larry Elliott, Europe should ease up on austerity and governments should invest more though increased borrowing.
‘This is textbook Keynesian stuff. Unemployment is high, which means businesses are reluctant to invest. The lack of investment means that demand for new loans is weak. The weakness of demand for loans means that driving down the cost of borrowing through QE will have little impact. Therefore, it is up to the state to break into the vicious circle by investing itself, something it can do cheaply and – because there are so many people unemployed and businesses working well below full capacity – without the risk of inflation.’
In the second article, Paul Mason, the Economics Editor at Channel 4 News, points to the large increases in both public- and private- sector debt since 2007, despite the recession. Such debt, he argues, is becoming unsustainable and hence the world could be on the cusp of another crash.
Mason quotes from the Bank for International Settlements Quarterly Review September 2015 – media briefing. In this briefing, Claudio Borio,
Head of the Monetary & Economic Department, argues that:
‘Since at least 2009, domestic vulnerabilities have developed in several emerging market economies (EMEs), including some of the largest, and to a lesser extent even in some advanced economies, notably commodity exporters. In particular, these countries have exhibited signs of a build-up of financial imbalances, in the form of outsize credit booms alongside strong increases in asset prices, especially property prices, supported by unusually easy global liquidity conditions. It is the coincidence of the reversal of these booms with external vulnerabilities that should be watched most closely.’
We have already seen a fall in commodity prices, reflecting the underlying lack of demand, and large fluctuations in stock markets. The Chinese economy is slowing markedly, as are several other EMEs, and Europe and Japan are struggling to recover, despite their QE programmes. The USA is no longer engaging in QE and there are growing worries about a US slowdown as growth in the rest of the world slows. Mason, quoting the BIS briefing, states that:
‘In short, as the BIS economists put it, this is “a world in which debt levels are too high, productivity growth too weak and financial risks too threatening”. It’s impossible to extrapolate from all this the date the crash will happen, or the form it will take. All we know is there is a mismatch between rising credit, falling growth, trade and prices, and a febrile financial market, which, at present, keeps switchback riding as money flows from one sector, or geographic region, to another.’
So should there be more expansionary policy, or should rising debt levels be reduced by tighter monetary policy? Read the articles and then consider the questions.
I told you so. Obama right and Europe wrong about way out of Great Recession The Guardian, Larry Elliott (1/11/15)
Apocalypse now: has the next giant financial crash already begun? The Guardian, Paul Mason (1/11/15)
- To what extent do the two articles (a) agree and (b) disagree?
- How might a neo-liberal economist reply to the argument that what is needed is more expansionary fiscal and monetary policies?
- What is the transmission mechanism whereby quantitative easing affects real output? Is it a reliable mechanism for policymakers?
- What would make a financial crash less likely? Is this something that governments or central banks can influence?
- Why has productivity growth been so low in many countries? What would increase it?
This weekend, Australia will play host to the world’s leaders, as the G20 Summit takes place. The focus of the G20 Summit will be on global growth and how it can be promoted. The Eurozone remains on the brink, but Germany did avoid for recession with positive (just) growth in the third quarter of this year. However, despite Australia’s insistence on returning the remit of the G20 to its original aims, in particular promoting growth, it is expected that many other items will also take up the G20’s agenda.
In February, the G20 Finance Ministers agreed various measures to boost global growth and it is expected that many of the policies discussed this weekend will build on these proposals. The agreement contained a list of new policies that had the aim of boosting economy growth of the economies by an extra 2% over a five year period. If this were to happen, the impact would be around £1.27 trillion. The agreed policies will be set out in more detail as part of the Brisbane Action Plan.
As well as a discussion of measures to promote global growth as a means of boosting jobs across the world, there will also be a focus on using these measures to prevent deflation from becoming a problem across Europe. Global tax avoidance by some of the major multinationals will also be discussed and leaders will be asked to agree on various measures. These include a common reporting standard; forcing multinationals to report their accounts country by country and principles about disclosing the beneficial ownership of companies. It it also expected that the tensions between Russia and Ukraine will draw attention from the world leaders. But, the main focus will be the economy. Australia’s Prime Minister, Tony Abbott said:
“Six years ago, the impacts of the global financial crisis reverberated throughout the world. While those crisis years are behind us, we still struggle with its legacy of debt and joblessness…The challenge for G20 leaders is clear – to lift growth, boost jobs and strengthen financial resilience. We need to encourage demand to ward off the deflation that threatens the major economies of Europe.”
Many people have protested about the lack of action on climate change, but perhaps this has been addressed to some extent by the deal between China and the USA on climate change and Barak Obama’s pledge to make a substantial contribution to the Green Climate Fund. This has caused some problems and perhaps embarrassment for the host nation, as Australia has remained adamant that despite the importance of climate change, this will not be on the agenda of the G20 Summit. Suggestions now, however, put climate change as the final communique.
Some people and organisations have criticised the G20 and questioned its relevance, so as well as discussing a variety of key issues, the agenda will more broadly be aiming to address this criticism. And of course, focus will also be on tensions between some of the key G20 leaders. The following articles consider the G20 Summit.
Ukraine and Russia take center stage as leaders gather for G20 Reuters, Matt Siegel (14/11/14)
The G20 Summit: World leaders gather in Brisbane BBC News (14/11/11)
G20: Obama to pledge $2.5bn to help poor countries on climate change The Guardian, Suzanne Goldenberg (14/11/14)
G20 in 20: All you need to know about Brisbane Leaders summit in 20 facts Independent, Mark Leftly (13/11/14)
G20 leaders to meet in Australia under pressure to prove group’s relevance The Guardian, Lenore Taylor (13/11/14)
Australia PM Abbott accuses Putin of bullying on eve of G20 Financial Times, George Parker and Jamie Smyth (14/11/14)
G20: David Cameron in Australia for world leaders’ summit BBC News (13/11/14)
G20 summit: Australian PM Tony Abbott tries to block climate talks – and risks his country becoming an international laughing stock Independent, Kathy Marks (13/11/14)
Incoming G20 leader Turkey says groups must be more inclusive Reuters, Jane Wardell (14/11/14)
Behind the motorcades and handshakes, what exactly is the G20 all about – and will it achieve ANYTHING? Mail Online, Sarah Michael (14/11/14)
Is the global economy headed for the rocks? BBC News, Robert Peston (17/11/14)
Official G20 site
G20 Priorities G20
Australia 2014 G20
- What is the purpose of the G20 and which countries are members of it? Should any others be included in this type of organisation?
- What are the key items on the agenda for the G20 Summit in Brisbane?
- One of the main objectives of this Summit is to discuss the policies that will be implemented to promote growth. What types of policies are likely to be important in promoting global economic growth?
- What types of policies are effective at addressing the problem of deflation?
- What impact will the tensions between Russia and Ukraine have on the progress of the G20?
- Why are multinationals able to engage in tax evasion? What policies could be implemented to prevent this and to what extent is global co-operation needed?
- Discuss possible reforms to the IMF and the G20’s role in promoting such reforms.
- Should the G20 be scrapped?
Finance ministers and central bank officials of the G20 countries are meeting in Sydney from 20 to 23 February. Business leaders from these countries are also attending and have separate meetings.
Amongst the usual discussions at such meetings about how to achieve greater global economic stability and faster and sustained economic growth, there are other more specific agenda issues. At the Sydney meeting these include a roundtable discussion to identify practical solutions to lift infrastructure investment. They also include discussions on how to clamp down on tax avoidance through means such as transfer pricing.
The G20 meetings of finance and business leaders take place annually. There are also annual summits of heads of government (the next being in Brisbane in November 2014).
The G20 was formed in 1999 to extend the work of the G8 developed countries to include other major developed and developing countries plus the EU. In 2008/9 it played a significant role in helping devise policies to tackle the banking crisis and combat the subsequent recession. At the time there was a common purpose, which made devising common policies easier.
Since then, the importance of the G20 has waned. Partly this is because of the divergent problems and issues between members and hence the difficulty of reaching agreements. Partly it is because, to be effective, it needs to remain small but, to be inclusive, it needs to extend beyond the current 20 members. Indeed there has been considerable resentment from many countries outside the G20 that their views are not being represented. Some representatives from non-G20 countries attend meetings on an informal basis.
The following articles discuss the role of the G20 and whether it is fit for purpose.
Janet Yellen vs. the world: The issues at the G20 finance summit Globe and Mail (Canada), Iain Marlow (20/2/14)
Turning ideas into action at the G20 Business Spectator (Australia), Mike Callaghan (21/2/14)
Boosting infrastructure investment can prove G20’s value to the world The Conversation, Andrew Elek (20/2/14)
Can the G20 ever realise its potential? The Conversation, Mark Beeson (21/2/14)
G20 has failed to fulfil its promise of collaboration amid hostility The Guardian, Larry Elliott (20/2/14)
Official G20 site
G20 Priorities G20
Australia 2014 G20
- Which countries are members of the G20? Compile a list of those countries you feel ought to be members of such an organisation.
- What are the arguments for and against increasing the membership of the G20 (or decreasing it)?
- Why is Janet Yellen, Chair of the US Federal Reserve, likely to be at odds with leaders from other G20 countries, especially those from developing countries?
- Why have the tensions between G20 members increased in recent months?
- Discuss possible reforms to the IMF and the G20’s role in promoting such reforms.
- What insights can game theory provide in understanding the difficulties in reaching binding agreements at G20 meetings? Are these difficulties greater at G20 than at G8 meetings?
- Should the G20 be scrapped?
Well they say that a day is a long-time in politics – that an awful lot can happen within 24 hours. The two days of the G20 summit have seemed like a lifetime. The meeting took place in Cannes from 3 to 4 November, 2011. It was the sixth such meeting of the G20: the 19 largest developed and developing countries plus the European Union.
As chair of the meeting, President Sarkozy of France had planned to address the two key global issues of securing a sustained global recovery and strengthening the global banking system. He also wanted to address other issues, such as climate change, commodity price volatility, social inclusion, corruption and corporate governance. But although these issues are covered in the final communiqué, what took centre-stage for the whole summit was the crisis in Greece and its impact on the eurozone.
The drama began on Monday 31 October. The Greek Prime Minister, George Papandreou, decided to call a referendum on the agreement reached at the eurozone summit in Brussels the previous week. In return for banks being required to take a loss of 50% in converting existing Greek bonds into new ones, Greece would have to continue with its tough austerity measures: measures that have caused the Greek economy to implode.
With worries that (a) the referendum would create several weeks of uncertainty, (b) that the agreement might then be rejected, (c) that the government might fall, stock markets plunged. French and German markets fell by over 5%. The Athens stock market fell by 7 per cent. The yield on Italian bonds passed 6%, amidst fears that if Greece defaulted, so too might Italy. But if the eurozone could survive a Greek default, it might not survive an Italian one. Even though several members of Mr. Papandreou’s Pasok party demanded his resignation, he stuck to his guns that an agreement had to have the consent of the Greek people. That was Tuesday.
The next day, Wednesday, was the start of the two-day G20 conference. What was to have been a meeting addressing wider issues of the global economy, was now having to focus on the Greek crisis. President Sarkozy and Chancellor Merkel made it clear that the next tranche of bailout money to Greece would not be paid until the deal agreed in Brussels was accepted by Greece. They gave the first indications that they might accept Greece’s withdrawal from the eurozone.
On Thursday afternoon, Mr Papandreou signalled that he would back down from the referendum if the opposition New Democracy party would join him in supporting the Brussels deal. He would not resign. But the opposition leader, Antonis Samaras, said that his party would not join with Mr Papandreou and that the Prime Minister should indeed resign. He did not resign, but abandoned the calll for a referendum.
With the Greek crisis dominating the meeting, little concrete agreement was reached. One important outcome, however, was the recognition that the financing of the IMF should be strengthened. As the final communiqué states:
We will ensure the IMF continues to have resources to play its systemic role to the benefit of its whole membership, building on the substantial resources we have already mobilized since London in 2009. We stand ready to ensure additional resources could be mobilised in a timely manner and ask our finance ministers by their next meeting to work on deploying a range of various options including bilateral contributions to the IMF, SDRs, and voluntary contributions to an IMF special structure such as an administered account. We will expeditiously implement in full the 2010 quota and governance reform of the IMF.
But despite this recognition of the key role of the IMF, the agreement was essentially that an agreement would be needed!
Eurozone crisis: yet another twist to Greek farce keeps leaders on edge of seats The Telegraph (4/11/11)
G20 summit: the main issues at Cannes The Telegraph (3/11/11)
Quick! More sandbags (filled with cash) The Economist, Charlemagne’s notebook (4/11/11)
The burning fuse The Economist, Charlemagne’s notebook (4/11/11)
G20 leaders agree to boost IMF resources BBC News (4/11/11)
G20 summit fails to allay world recession fears Guardian, Patrick Wintour and Larry Elliott (4/11/11)
G20 summit: roll call of doom for a dysfunctional family Guardian, Angelique Chrisafis (3/11/11)
Euro zone finds no new money for debt crisis at G20 The Economic Times of India (4/11/11)
Shares jump after referendum ditched New Zealand Herald (5/11/11)
Bunds rise on EFSF worries, Italy under pressure Reuters (4/11/11)
Eurozone crisis: The possible resolutions BBC News (4/11/11)
The G20 aren’t running to Europe’s rescue BBC News blogs, Stephanie Flanders (4/11/11)
Is the euro about to capsize? BBC News, Laurence Knight (4/11/11)
Meeting of Finance Ministers and Central Bank Governors: final communiqué G20–G8 France 2011 (4/11/11)
- Why might the ‘game’ between the eurozone leaders and George Papandreou be seen as a prisoner’s dilemma game? What are the payoffs?
- Why might increasing the bailout for Greece represent a moral hazard for the eurozone leaders?
- Trace through market reactions between the 31 October and the 4 November and explain the movements.
- How crucial is the IMF in achieving global stability and economic growth?
- Assess the success of the Cannes G20 conference.