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Home > Blogs > Ian Fraser and Anthony Harrington > Review of 2010: The G20 and the US recovery

Review of 2010: The G20 and the US recovery

G20 and US economy | Review of 2010: The G20 and the US recovery Ian Fraser and Anthony Harrington

Much was expected of 2010 and in emerging markets, much was delivered. However, what became abundantly clear through 2010 was the weakness and fragility of the recovery in developed markets, where the threat of either a slide down into a double dip recession or a drift into a deflationary scenario remained as threats to varying degrees as we went through 2010. To some extent both threats look set to continue to haunt the developed parts of the global economy as we move into 2011, even as developing markets are threatened with inflation. 

National governments, of course, have not stood idly by through 2010. Extraordinary stimulus measures have been introduced by central banks and there has been huge scrutiny by all interested parties of the proposed new regulatory regimes. The G20 group of nations, which includes many emerging market economies, has been the front runner in stimulating and coordinating regulatory initiatives.

Our blog, India’s take on the G20: an emerging market view, offered an emerging markets perspective on the G20’s performance to date. Dr. Subir Gokarn, the Director General of the Reserve Bank of India, pointed out that the precursor to the G20, the G8, was first convened in 1998, with the Asian crisis very much in mind. The G20 was formed a year later and met for the first time in Berlin to mull over the Asian crisis and the Russian economic crisis.

Dr. Gokarn pointed out that both the G8 and the newly constituted G20 were rather ineffectual back then, in terms of having any real impact on either crisis. “Since the crash had no significant macro economic impact on the advanced economies, they had no particular interest in pursuing any collective strategy for structural change,” he noted. The G20 made a much better fist of things when it met in Washington to forge a collective response to the 2007-2008 crash. This time, with developed markets taking the full force of the crash, everyone was suitably incentivised to “do the right thing”.

However, as Dr. Gokarn observed, the G20 is not a homogenous group of countries. The group has a “number of dividing lines based on one or more of the following descriptive criteria: large or small, more or less affluent, net importers or exporters, commodities producers or manufacturers and, of course, population demographics." Equally critical is whether their economies are stalling, in sluggish growth mode, or growing well. Different positions on these dimensions generate very different policy priorities, so acting in unison for the G20 is now extremely difficult. “Whichever way one looks at it, the composition of the group does not inspire much confidence that it can agree on common approaches to the structural issues that confront the global economy,” Dr. Gokarn says.

The G20 proved the perspicacity of his analysis as 2010 drew to a close, with its most recent meeting, in Seoul in November, being singularly lacking in substance, and with the group communiqué doing a poor job of papering over the obvious differences in outlook between members.

In short, developing nations regard the massive, second round quantitative easing programme being run in the US (scheduled to be worth $600 billion or more by mid 2011) and also the anticipated further rounds of QE by the Bank of England in the UK and the European Central Bank in Europe, as de facto aggressive currency depreciation. Their worry is that it will – as it has in fact done – make their currencies strengthen against those of their key export markets, and will thus harm their export initiatives, which they see as critical to their own growth prospects.

There is also a widespread fear that quantitative easing by the US will give rise to an uncontrolled flow of overseas investment and so-called “hot money” which might overwhelm their economies – for example by inflating asset-price bubbles or sparking inflation. Many emerging economies have therefore been aiming to control capital flows with a range of central bank measures whilst prioritizing the “stickier” categories of overseas capital, such as foreign direct investment.

This is all part of the so-called “currency wars”, or a competitive race to the bottom as countries strive to weaken their currencies back to at least the status quo ante with respect to a weakening US dollar.

Dr. Gokarn’s unique contribution from an emerging markets perspective was to see that if QE is one of the few tools – if not the only one – available to stop the US economy from spiralling into depression, then it might be a plus for emerging economies in the medium term. They need a US economy restored to health if their export industries are to thrive.

While it is easy to find pessimistic views of how the world has fared in 2010, it is also clear that for many senior figures in industry, the fact that we have not already plunged headfirst into ruin is itself a strong positive. We reported a speech by Brian Moynihan, President and Chief Executive Officer of Bank of America (at the time of writing, anticipated to be the main target of Wikileaks’s next round of revelations) in which he gave a very upbeat assessment of what the global scorecard looked like by the third quarter of 2010. The fact to focus on, he suggested, is that with global growth in total set to be a shade under 4 per cent in 2011, no matter how flat some developed economies might be, that level of growth creates real opportunities for multinational companies to go after.

However, developed economies have been struggling against obvious headwinds throughout the year. Official unemployment in the US is still stuck at just under 10% with real unemployment (which counts those who have given up looking for work) closer to 23%. While the economy is creating new jobs, it is running to stand still as it is only creating enough to stop unemployment rising further. By the end of 2010, it still hadn’t created enough new jobs to give the unemployment graph any kind of positive slant. Flat is not positive, it’s just not negative.

Even giving things a positive spin Moynihan was compelled to point out that US debt has now reached levels relative to GDP not seen since World War II, going from 40% of GDP to 100% and more of GDP before QEII.

Moynihan’s strongest point, to quote from the blog,

“is that a major economy – and they don’t come any bigger than the US economy – is an incredibly resilient system. It may look broke, but even if employment and underemployment hit 20%, that would still mean that the economy was 80% fully functional, and by the laws of the jungle, that 80% would tend to contain a very high percentage of companies who had been made fit and lean by two years of tough times.”

Quite how that pans out for 2011 remains to be seen. Let us hope that the “glass half full” version of reality turns out to be the right take on things.

Tags: developed markets , double dip recession , emerging markets , G20 , GDP growth , global imbalances
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