2016 G20 Summit: Who Needs to Do What?

Yawn, we are approaching another G20 summit. Yawn because these summits have a history of proclaiming self-evident truths that subsequently aren’t implemented.

A soap box…

The promises made at these summits are as quickly forgotten as the stiff photo snapshots with 20 or so world leaders have been made.

The 2016 G20 Hangzhou summit, to be held on September 4-5, 2016, will be the eleventh G20 meeting.

China’s slogan for this summit is “Towards an innovative, invigorated, interconnected, and inclusive world economy.” Who could disagree?

… but serious action?

What are the macroeconomic stakes? First, to stimulate growth, fiscal expansion in G20 surplus countries is urgently required. Second, G20 structural policy should focus on rolling back the protectionist measures taken since 2008 in the G20.

Third, monetary policy is largely exhausted. At the preceding G 20 Brisbane summit, G20 leaders set the goal of lifting GDP by at least 2 percent by 2018.

Yet, despite unprecedented monetary stimulus much of the G20, GDP growth projected for 2016 remains well below target growth in the Euro area (1.6%) and in Japan (0.3%), according to the IMF (WEO Update, July 2016).

Don’t blame China

Don’t blame the host, China, for that failure: In 2015, China contributed roughly 30% to global economic growth — even with its growth slowing to 6.9%.

The increment of GDP that China added to the world economy in 2015 was around $760 billion. That is notably more than the entire GDP of South Africa, the world’s 30th largest economy.

Overburdening central banks

The policy package required for achieving the Brisbane goal – monetary, fiscal, structural – seems to have relied excessively on the central banks to do a growth job for which they aren’t assigned.

• Monetary policy

The collateral damage of monetary easing has been the danger of competitive devaluations, notably of the Japanese Yen. G20 policymakers have repeatedly pledged to refrain from competitive devaluations and not to target exchange rates for competitive purposes.

China hopes to constrain Japan on FX intervention with the help of the Hangzhou summit. According to Deutsche Bank´s August 2016 FX valuation snapshot, the Chinese Yuan ranks with the Swiss Franc as the most overvalued currency on all metrics used.

From China’s perspective then, there is little room for monetary easing elsewhere but in Beijing. It would be disingenuous to ask Beijing for more appreciation, also from a global growth perspective.

Enlarge Source: Deutsche Bank Research, FX Valuation Snapshot

• Fiscal policy

In contrast to monetary policy, there is ample room in G20 surplus countries for fiscal expansion. G20 surplus countries beggar their neighbors by crowding in foreign demand via their savings-investment surplus.

Within the G20, China, Japan, South Korea, Russia, and the eurozone ran a balance of payments surplus last year of over $1 trillion, an average 4% of their GDP.

Raising public spending and lowering income taxes in the G20 surplus countries, notably in Germany and Korea, are the most direct way to stimulate world demand and growth in times of zero interest rates.

• Structural policy

The G20 should put priority on a rollback of trade protectionism. While global trade stagnates, FDI into G20 nations has yet to break out of a narrow range witnessed since 2009.

According to the latest report by www.globaltradealert.org, the sustained violation of the G20’s pledge on protectionism has resulted in nearly 4,000 trade barriers and distortionary incentives.

Seven G20 members have implemented more protectionist measures this year compared to their crisis-era annual average. They are: Australia, the US, UK, Saudi Arabia, Italy, France and Germany.

The five BRICS countries, by contrast show a better trade policy performance, but only in comparison.

Enlarge Ranking G20 Member Protectionism. Source:FDI Recovers? The 20th GTA Report, CEPR Press 2016.

Name and shame specific G20 countries (as outlined here) that are first and foremost responsible for global lackluster growth. This is the noble task that G20 leaders will face this weekend.

The odds are that, once again, they won’t live up to that task. Instead, they and their staffs will do their utmost to “paper over” the real differences.