G-20 sees global economy strengthening amid shocks
FE Team | Published: April 18, 2011 00:00:00 | Updated: February 01, 2018 00:00:00
WASHINGTON, April 17 (Bloomberg): Group of 20 finance chiefs said the world economy is strengthening even after recent shocks as they fleshed out details of a surveillance system aimed at highlighting and fixing fault lines that threaten growth.
While the recovery is "broadening and becoming more self- sustained," social unrest in the Middle East and North Africa, as well as Japan's earthquake, raise "uncertainty" in the outlook, the G-20's finance ministers and central bankers said after talks yesterday in Washington. The officials outlined methods to decide when indicators, including budget deficits and external trade balances, appear excessive.
Policy makers want to spot imbalances earlier and then prescribe policies to rectify them before they imperil global growth. The intent is to encourage more-balanced international expansion after uneven trade and investment flows helped trigger the credit crisis.
"The guidelines operate like a net which holds the countries which violate or do not respect" the benchmarks, French Finance Minister Christine Lagarde told reporters. Seven countries, including the US and China, are large enough to be of systemic importance and will face tougher scrutiny.
The discussions have proved difficult, as China signaled concern that the initiative will give the U.S. and Europe new ammunition in their push for the yuan to appreciate faster. Differences over the root causes of imbalances and the lack of a mechanism to enforce policy shifts may still undermine the initiative, said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto.
"We're a long way from fixing the global imbalances," said Sutton.
The G-20 oversees 85 percent of the world economy and policy makers including US Treasury Secretary Timothy F Geithner and Brazilian central bank governor Alexandre Tombini met as investors debate the strength of the expansion. While data yesterday showed China grew a faster than estimated 9.7 per cent in the first quarter, its policy makers are trying to curb the quickest inflation in three years. Elsewhere, higher oil prices are sapping consumer spending in the US, Japan is struggling after last month's natural and nuclear disaster and Europe is still battling a debt crisis.
The G-20 noted "increasingly robust" demand growth as a reason for confidence. Germany-based carmaker Volkswagen AG (VOW) yesterday posted record first-quarter sales, powered by deliveries of models in China, Europe and the U.S. France's Carrefour SA, the world's second-largest retailer, this week reported first-quarter sales rose 3.9 percent, led by Latin America and Asia.
Officials of the G-20 said downside risks remain, although there is enough capacity to meet global energy demand while oil exceeds $100 a barrel.
The G-20 also agreed to strengthen coordination "to avoid disorderly movements and persistent exchange rate misalignments" and to establish a path to increasing the number of currencies that comprise the IMF's Special Drawing Rights. Members will also research the use of capital controls further, officials said.
Having agreed in February to monitor indicators, including budget deficits and private savings rates, for signs of imbalances, the G-20 yesterday outlined the guidelines against which they will be assessed. Two are focused on the circumstances and history of each economy and the others on historical comparisons with the remainder of the G-20 and similar countries.
A nation identified as having persistently dangerous levels of two of the measures will be subjected to further study and may have remedies suggested.
Countries accounting for more than 5 per cent of the G-20's gross domestic product will be more rigorously studied given their "greater potential for spillover effects," the statement said. The seven are the US, Japan, Germany, France, UK, India and China, Canadian Finance Minister Jim Flaherty indicated.
The G-20 wants to avoid a repeat of the last expansion when trade imbalances opened, which helped spark the deepest global recession in seven decades. China and other Asian nations recycled the dollars from their trade surpluses into U.S. bonds, depressing global yields, while US consumers relied on the low interest rates to drive an unsustainable global spending spree and record trade deficit, in a self-reinforcing cycle.
The International Monetary Fund this week predicted global current account imbalances will remain wide if countries with trade surpluses, such as China, fail to spur domestic demand and those with trade deficits, like the US, don't save more. Data also showed China's currency reserves exceeded $3 trillion for the first time; in the US, lawmakers are at odds over how to pare a record budget deficit.
The next step is for officials to fine-tune the plan and present leaders with a list of those countries aggravating imbalances at a November summit in Cannes, France.
Slowing agreement on the guidelines has been suspicion on China's part that it's being bullied into letting the yuan appreciate more quickly. China has limited its currency's gain to about 4.5 per cent against the dollar since the end of 2009, sparking criticism the world's second-largest economy is fueling domestic inflation, building excessive reserves and exacerbating trade deficits.
The yuan gained 0.05 per cent this week to end at 6.5325 per dollar, according to the China Foreign Exchange Trade System. It declined 0.02 per cent yesterday and touched 6.5290 earlier, the strongest level since the country unified official and market exchange rates at the end of 1993.
Chinese central bank governor Zhou Xiaochuan said yesterday in the southern Chinese province of Hainan that the G-20 should focus on economic issues and that his nation will continue to allow more flexibility in the yuan. Chinese officials say low interest rates in the west are causing strong capital flows into emerging markets such as theirs.
"The communique has fully reflected demands of all parties and is balanced," China vice finance minister Zhu Guangyao said in Washington. "China is satisfied with the result."
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