Tight security
▶ The IMF chief says leaders should introduce reforms to increase gross domestic product for the group
Police set up fences in Buenos Aires yesterday ahead of the G20 leaders summit which begins tomorrow.
G20 leaders need to act swiftly to avert a tapering in economic growth and introduce reforms that can add 4 per cent to the group’s gross domestic product, the International Monetary Fund chief said yesterday.
The heads of the world’s 20 biggest economies, which represent 85 per cent of the global GDP, will gather in Buenos Aires tomorrow amid escalating trade tensions between the US and China, the rise of protectionism, slowing economic growth and Brexit challenges.
“As G20 leaders gather in Argentina, the global economy faces a critical juncture,” IMF managing director Christine Lagarde said in a blog. “We have had a good stretch of solid growth by historical standards, but now we are facing a period where significant risks are materialising and darker clouds are looming.”
The G20 meeting is taking place against a bleak backdrop. The IMF revised down its global economic growth forecast to 3.7 per cent for 2018 and 2019 from its 3.9 per cent projection in July, the first downgrade since July 2016. Trade war headwinds, emerging market woes and sluggish growth in the eurozone economies are contributing to the gloomy outlook.
“As the most recent economic data has been disappointing, we must not allow ourselves to be held back,” Ms Lagarde said. “Rather, we must be ambitious, including by implementing a multi-layered set of reforms which could potentially add an additional 4 per cent boost to the GDP of the G20 countries.”
Germany, Europe’s largest economy, contracted by 0.2 per cent in the third quarter, a foreboding sign of an end to the five-year expansion in the eurozone.
Meanwhile China’s GDP grew at a lower-than-expected 6.5 per cent in the third quarter, the weakest pace in the world’s second-largest economy since the global financial crisis.
“For example, third-quarter growth has been surprisingly low in emerging market economies such as China, and in the euro area. A no-deal Brexit could further dent confidence,” said Ms Lagarde.
“Over the medium-term, particularly in advanced economies, we see growth moderating because of adverse demographics and slow productivity. This includes the US, once the recent fiscal stimulus ends.”
Ms Lagarde suggested three priorities for reforms among G20 countries to achieve the additional 4 per cent boost to their economies.
The first priority includes fiscal consolidation in countries such as debt-laden Italy, which has locked horns with the European Union over its budget, and a “gradual, well-communicated, and data-dependent” path of interest rate increases to avoid creating mayhem in other economies.
The US Federal Reserve is expected to raise interest rates for a fourth time when it meets next month. But the pace of next year’s increases is unclear after chairman Jerome Powell signalled a pause may be in the works, although a median forecast of policymakers in September had projected three quarter-percentage point increases in 2019.
Meanwhile, the European Central Bank is preparing to unwind its bond purchases programme in December but has yet to indicate when it will raise interest rates.
The second priority for G20 leaders, according to Ms Lagarde, should be teamwork to collectively avert building trade barriers that are “ultimately self-defeating for all involved” and reverse recent tariff increases.
“We have a unique opportunity to improve the global trade system,” she said. “IMF research suggests that liberalising trade in services could add about half per cent, or $350 billion, to G20 GDP in the long run.”
Ms Lagarde’s comments come as US President Donald Trump, who is set to meet his Chinese counterpart Xi Jinping during the G20 meeting, threatened again this week to impose more duties on Chinese exports to the US after slapping tariffs on $250bn worth of Chinese imports in the recent months.
The US is set to raise tariffs on $200bn of these goods from the current 10 per cent to 25 per cent on January 1, 2019.
The third priority for G20 chiefs should be the acceleration of reforms such as relaxing product market restrictions, Ms Lagarde added.
“Easing access to professional services would be especially important, for example, in Japan and many euro area countries. Increasing support for research would be vital in Canada, Germany, and the UK, among others,” she said.
Third-quarter growth has been surprisingly low in emerging market economies such as China, and in the euro area CHRSTINE LAGARDE IMF managing director
This weekend’s G20 summit in Argentina is likely to demonstrate what does and doesn’t work for this multilateral format, but also for international policy gatherings more generally.
Despite weakening and diverging global economic growth, the aspiration for the larger discussions among leaders representing about three quarters of global gross domestic product has been reduced to issuing bland joint communiques – assuming an agreement on this can be achieved.
The real action will be taking place in the bilateral meetings that occur on the sidelines, with particular interest in the conversation between US President Donald Trump and Chinese President Xi Jinping.
Created with the hope to reflect new global economic realities, the G20 has been on a downward trend since its successful London summit in April 2009. It remains a more representative group than the G7, which is dominated by developed economies, and it has a more flexible setup than many international organisations.
But its accomplishments - be they in the formulation of policy initiatives or the monitoring thereof – have been largely disappointing and limited. This is not expected to change any time soon, despite the mounting challenges facing global economic well-being and financial stability.
After last month’s disappointing conclusion of the Asia-Pacific Economic Co-operation Summit, the big hope is that this time the G20 will be able to agree on a concluding communique. But for this to occur, the content is likely to be watered down substantially.
Such a statement would have to reconcile differences on key policy issues, such as China-US trade tensions, while also obfuscating political constraints on the pursuit of pro-growth policies, particularly in Europe.
Meanwhile, no progress is expected on remedying the deficiencies of the G20 construct, including the absence of a small secretariat that would offer greater scope for policy monitoring.
This isn’t just a G20 issue. Little, if anything, actionable and beneficial has emerged from recent mult gatherings, including last month’s annual meetings of the International Monetary Fund and the World Bank, which were attended by economic policymakers from almost 190 countries. What has proven more productive are the bilateral formats. And this time, the focus will be on one meeting in particular.
Against the background of the escalating trade skirmish between China and the US, markets are hoping that the tete-a-tete between Presidents Trump and Xi will be a turning point for the two countries and the global economy. For this to happen, China and the US must embrace explicit policy pivots.
For Mr Xi, this would imply credibly abandoning China’s tit-for-tat approach to US tariffs and offer concessions in three areas: relaxing joint-venture requirements on US companies operating in China, and other practices that result in forced transfers of technologies, human capital and operating business plans.
There is also needs to be a verifiable action plan to combat intellectual-property theft and a way to show how the bilateral trade imbalance is likely to fall.
This won’t be easy, but it is better than the alternative of risking a major economic derailment that would reduce China’s prospects for avoiding the so-called middle-income trap that has interrupted the development process of many other emerging economies.