Park: Sluggish Growth Cannot Count:
Back to the Drawing Board for World Leaders?
Daniel C. Park, Analyst, G20 Research Group
September 3, 2016
See also Comment @ G7G20.com
Almost a decade after the 2008 financial crisis, the world economy has yet to fully recover: growth remains sluggish, uncertainties persist and markets still operate amidst outbursts. Such a dim economic outlook is difficult to ignore. Global governance bodies and international financial institutions recognize the gravity of the problem. According to the latest World Economic Outlook (WEO) issued by the International Monetary Fund (IMF), although global growth continues, it does so at a modest and uneven pace. Such a "modest" pace has made the world economy vulnerable to risks. The WEO now forecasts global growth of 3.2 percent in 2016 and 3.5 percent in 2017 — a downward revision of 0.2 percent and 0.1 percent, respectively, compared to the January 2016 WEO figures. Growth is nowhere near adequate. The IMF chief economist Maurice Obstfeld warns that "persistent slow growth has scarring effects that themselves reduce potential output and with it, demand and investment ." Tough questions loom. Why does the sluggish global growth and recovery persist? Why has the G20 failed to recapture the growth momentum of the decades prior to the financial crisis?
The call for fundamental monetary, fiscal, and structural reforms has been ever so loud. Yes, in 2016 such hopes seem unrealistic thanks to new problems that have arisen, one of which is Brexit. The economic policy divorce between the United Kingdom and the European Union is official, but no one knows when the UK will formally exit the bloc. Such uncertainty is bad for markets. At the G20 finance ministerial meeting in Chengdu this year, UK chancellor Philip Hammond indicated that "a measure of uncertainty" will continue until the "conclusion of [the UK's] negotiations with the EU." Thankfully, both the G20 and the G7 were quick to provide some reassurance; they committed to mitigate and curtail the economic turmoil triggered by Brexit. The communiqué of the Chengdu meeting declared that the G20 members would "proactively address the [consequences of Brexit]" by "using "all policy tools." As well, in alignment with the Bank of England's decision to inject a liquidity package of USD370 billion into the banking sector, other G7 central banks are on a standby to open the liquidity floodgates if required. However, given that the UK has only 2.36 percent of global gross domestic product (GDP) at purchasing power parity, Brexit is not the only culprit of 2016's sluggish global growth.
Prior to the Chengdu ministerial meeting, another had been held in February 2016. It offered some optimism for all G20 members. Finance ministers and central bank governors pledged not to fix their currencies to capture a competitive edge. But why? Any fixing of currency as part of a country's monetary strategy can endanger the world economy as a whole — excess volatility and disorderly movements in exchange rates can impede global growth. More pressingly, it can have more adverse implications for already stuttering global growth. By no means was the pledge aimed at China. This Asian power was not the first to manage or manipulate its currency. However, China seems to override its own exchange rates and deflates the renminbi. The People's Bank of China (PBOC) made headlines in August 2015 with a two-day devaluation of the renminbi, jolting global markets.
Did China convincingly abide by its G20 pledge? At the February meeting, PBOC governor Zhou Xiaochuan promised his G20 colleagues that China "will not use competitive devaluation to support China's exports ." And yet, it did so in practice three months later when the PBOC devalued the renminbi by 0.34 percent to 6.5693 against the US dollar. And after the US dollar surged in the wake of the Brexit vote, the PBOC yet again devalued the renminbi to 6.6375 against the greenback. Even so, on the eve of the Hangzhou Summit, Chinese finance minister Lou Jiwei, in China G20: The Hangzhou Summit urged the "[use] all policy tools" — including "refraining from competitive devaluation" — to combat shocks and revitalize the world economy. Given such inconsistency, uncertainty over the exchange rate market looms ever more intensely.
The year 2016 has erected a difficult wall for the G20 to overcome: the UK's vote to withdraw from the EU creates a mess, and China appears to have no plan to stop its devaluation. How are the 20 economic powerhouses, representing 85 percent of the world's GDP, respond?
They seem decided at the G20 finance meeting in February 2016, the United States along with the IMF, urged other G20 members to adopt a fiscal stimulus package to revitalize their domestic demand. A New Deal–like package has traditionally been the fix for the US economy. However, while such a model saw much success in the United States, German finance minister Wolfgang Schaeuble advised that such "debt-financed" growth models offer only short-term growth: the model exacerbates the already high GDP-to-debt ratio that many economies suffer; it triggers bubbles and excessive risk taking. Unlike the fiscal deficit–trapped United States, fiscal surplus countries such as Germany and China called for an alternative strategy — a structural reform to reorganize market capacity and operations to generate greater efficiency and equity. A consensus has yet to be reached.
Nearly a decade into the post-2008 financial crisis era, recovery has picked up, but not nearly enough. Whether it be on fiscal stimulus or structural reform, a consensus is urgently required. At the G20 Hangzhou Summit, a creative compromise between the two strategies must be found to revitalize the limping world economy and escape the long-lasting growth trauma of 2008 — new and old problems that have been consuming the world economy amidst a sea of uncertainties must end, once and for all.
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Daniel C. Park is a fourth-year student studying international relations and contemporary Asian studies at Trinity College in the University of Toronto. Daniel serves as a compliance director for the G20 Research Group, editor-in-chief for Synergy: The Journal of Contemporary Asian Studies at the Munk School of Global Affairs' Asian Institute, and as a research assistant at the Department of Political Science at York University.
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