Best the G-7 can do for global economy: not make it ‘worse’
Space for action is increasingly limited
BIARRITZ, France, Aug 25, (AP): The global economy craves a double shot of confidence right now. The most the leaders of the Group of Seven can offer is likely to be a less intoxicating cocktail: the simple promise not to make things any worse.
Sharp differences over US President Donald Trump’s trade conflict with China and threats to escalate trade tensions with Europe, along with Britain’s impending departure from the European Union on terms yet to be decided, are making it unlikely the leaders of seven rich democracies can come up with a unified road map on how to help global growth.
What the global economy doesn’t need is an outcome like last year’s summit in Canada. Leaders wrestled over a final joint statement, only to have Trump repudiate his signature shortly after leaving the summit and tweet criticism of the host, Canadian Prime Minister Justin Trudeau. This year’s host, French Prime Minister Emmanuel Macron, has indicated he will avoid that possibility by simply not having a statement. Instead, Macron may issue his own careful summary of what was discussed.
Even if the leaders, who discussed the economy Sunday morning, issue a final statement, it’s unlikely to contain a solution to what’s deterring investment and dampening business confidence.
In some ways the global economy is doing fairly well at the moment, with unemployment low in major economies. Yet world trade and industrial investment and production have slowed sharply – and those are the forces that could carry forward the decade-long economic expansion since the Great Recession.
By imposing tariffs, or import taxes, on Chinese goods, and by threatening to impose new ones on European autos and even French wine, Trump has sown uncertainty among businesses about their supply chains – the paths that raw materials, parts and goods take as they move through the globalized economy. Markets have become volatile, dropping sharply last week after the US and China exchanged more tariffs.
Holger Schmieding, chief economist at Berenberg Bank in London, says that while the direct damage from the tariffs is so far limited, the lack of clarity over terms of trade is corroding confidence.
“Entrepreneurs and firms only invest when they feel confident about the outlook,” he said. “The pervasive uncertainty about the future of global trade and the resulting need to restructure cross-border supply chains weighs heavily on industrial sentiment and investment.”
Business, he noted, is driven by “animal spirits” – a term coined by 20thCentury British economist John Maynard Keynes to describe the optimism needed to take risks and invest.
Trump’s unpredictable Americafirst economic nationalism is upending decades of rules-based economic cooperation rooted in global institutions like the World Trade Organization and the Group of Seven itself, which this year featured big disagreements among world leaders.
Space for action is increasingly limited, and not just by Trump’s disruption.
The US Federal Reserve has little room to lower interest rates, and the European Central Bank’s even less, with its key benchmarks at or below zero. They could resume stimulus programs that include buying bonds to lower borrowing rates. But borrowing rates are already extremely low.
Many governments still have debt hangovers from the global financial crisis, leaving less room for spending to stimulate investment and consumption. Germany has been running a surplus and has balked at taking on new debt to spend on things that could raise growth, such as roads and bridges and high-speed internet coverage for the whole country.
China’s growth has slowed from its previous red-hot pace, which often happens when an emerging economy starts to catch up with the rest of the world. Aging populations in many developed economies will strain tax revenues and lower consumption.
Rock-bottom borrowing costs have led to calls for governments to borrow and spend more to take up where central banks have run short of ammunition.