Citing mounting threats to the global economy, world financial chiefs vowed to accelerate long-promised economic overhauls to ease the burden on the easy-money stimulus policies that are fast running out of steam.
Finance ministers and central bankers from the Group of 20 largest economies meeting in Shanghai during the weekend sought to allay growing concerns that fissures in the global economy–including the potential for a sharp deceleration in the Chinese economy–could pitch the world back into recession.
“We will use all policy tools–monetary, fiscal and structural” to strengthen growth, boost investment and ensure stability in financial markets, the G-20 said in its official communiqué issued Saturday after two days of intense talks.
Global markets have shuddered in recent months amid a souring growth outlook, overall weak demand and anxieties that China’s economy may be falling faster than Beijing acknowledges and might potentially undermine an increasingly fragile global economy. The International Monetary Fund earlier this week said it likely would downgrade its forecast in coming months, calling for a coordinated program to boost demand.
“There’s clearly a sense of renewed urgency” among the G-20 countries, IMF Managing Director Christine Lagarde said after the meeting. “They don’t have much time left.”
The G-20 said “downside risks and vulnerabilities have risen,” pointing to volatile capital flows, the commodity price plunge and a potential exit of the U.K. from the European Union in a list of threats to global growth.
“Additionally there are growing concerns about the risk of further downward revision in global economic prospects,” the group said.
Although the G-20 said countries may need to explore ramping up spending, its promises fell short of calls by the IMF and others for a coordinated stimulus package to revive flagging output. And there was no discussion of any sort of currency accord, as suggested by some investors, as a way to temper global economic turmoil.
But the G-20’s statement reflected a gathering consensus that many countries are depending too heavily on monetary policy to stimulate growth. The statement reiterated a pledge for countries to refrain from cheapening their currencies to gain a competitive edge–another sign of concern about China, among others.
“We’ve been practicing monetary policy accommodation now for many years, and clearly that is an area of diminishing returns,” said Angel Gurría, secretary-general of the Organisation for Economic Cooperation and Development.
German Finance Minister Wolfgang Schäuble said debt-financed fiscal policies and easy money monetary policies may have prevented the financial crisis from spiraling out of control, “but they may have laid the foundation for the next crisis.”
Instead, G-20 countries said they would speed up implementation of previous commitments to restructure their economies, efforts meant to raise longer term growth prospects and encourage investors concerned about anemic expansions.
In 2014, the G-20 outlined a plan to add $2 trillion more in goods and services to the $75 trillion global economy. Two years later, the group has failed to deliver more than half of those promised reforms and growth is more than a half percentage point lower than forecast rate of 4.1%.
Japanese Prime Minister Shinzo Abe’s plan to use monetary easing, government spending and structural reforms to revitalize a country long mired in low growth has fallen flat. Brazil’s government, rocked by a continuing corruption scandal and in the middle of a two-year-plus contraction, has put off its reforms, including infrastructure investments needed to deepen the arteries of commerce. A thicket of regulations constrain foreign investment in India.
Central banks, however, have kept the easy-money spigots open. Europe and Japan are now delving into the uncharted–and some say risky–waters of negative interest rates in an increasingly desperate effort to jump-start perennially sluggish growth.
Measures such as those that push the value of currencies down haven’t been accompanied by promised structural revamps such as rewriting industry regulations and tax codes. That, officials say, is undermining the impact of monetary policy.
Turmoil overseas is weighing on one of the few bright spots in the global economy, the U.S., where the Federal Reserve is considering slowing the pace of rate increases. “We need to redouble our efforts to boost global demand rather than relying on the U.S. as the consumer of first and last resort,” U.S. Treasury Secretary Jacob Lew said.
Meanwhile, as China’s slowdown grinds on, capital is rushing for the exits by about $100 billion a month recently, stoking concerns that Beijing may revert to currency devaluation. That, in turn, might not only spur investor panic about the world’s second largest economy, but also trigger a cascade of other exchange rates depreciations around the globe.
Senior Chinese officials worked hard to reduce anxiety about the nation’s economic transition. China’s central bank Governor Zhou Xiaochuan played down the likelihood authorities intend to push the yuan lower.
Many officials praised Beijing’s statements. “There was a clear and credible communication from the Chinese,” said Pierre Moscovici, Europe’s economic commissioner.
Enough doubt lingers that G-20 countries said they would consult closely on exchange rate policies. “It’s a commitment to keep each other informed and avoid surprising each other because that’s what you do when you want to try to conduct your policies in an orderly way,” Mr. Lew said.
Financial sector policy makers agree that China remains one of the world’s fastest-growing economies and isn’t in crisis, cushioned by $3 trillion in foreign exchange reserves.
Uncertainties abound, however, about how successful Beijing will be in guiding the economy toward consumer demand and how much pain it is ready to endure in moving away from the investment-led model that produced years of growth.
The massive capital outflows and plunges in China’s stock markets that have erased trillions of dollars of market capitalization worry global markets that many Chinese are losing confidence.
Given the G-20’s slow uptake in delivering structural overhauls, markets may have reason to doubt the group’s ability to take the weight off central banks.
Koichi Hamada, a special economic adviser to Japan’s prime minister, suggested Tokyo should intervene in exchange markets to keep investors from pushing the yen’s value up.
“Sporadic interventions may be needed to punish speculators who are taking advantage of temporary market psychology to keep the yen far above its market value,” Mr. Hamada wrote in a blog post on Friday.