Sunday, July 03, 2005
G8 ignore economic perils at the summit
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

IN years to come we may look back on this week’s G8 summit in Gleneagles as the end, or at least the beginning of the end, of an era. These summits have had a pretty good innings, dating from the “Library Group” of finance officials from Europe, Japan and America, invited to Washington in 1973 to discuss the first Opec oil crisis.

Two years later France’s president, Valéry Giscard d’Estaing, invited the leaders of America, Britain, Germany, Italy and Japan to Rambouillet, near Paris, for a world economic summit. The rest is history. Canada was soon invited; Russia more recently as a reward for abandoning communism.

In 30 years, it is doubtful whether any summit has been surrounded by as much hype as this one. Yesterday’s Live8 concerts had a potential worldwide television audience of 5.5 billion, although an actual one much smaller. We have had marches, soppy dramas by Richard Curtis and a whole lot else. There will be more to come.

So why, when G8 summitry is apparently at the height of its powers and influence, do I say its days may be numbered? One factor, plainly, is that the world economy’s axis is shifting.

Half the G8’s members are from Europe. Three — France, Germany and Italy — are from the eurozone. This cannot last. In 2004 China contributed three times as much to global growth as the 12 euro member countries combined. India provided more of a growth contribution than euroland. The G8’s membership is wrong, and the first step should be the replacement of Italy and Canada with India and China. In 30 years, the big three economies will be America, China and India.

That is not the only problem. There are some fairly pressing economic issues, high among them the effect on the global economy of high oil prices and the dangers of world economic imbalances, most notably the yawning American current- account deficit — and Europe’s chronic problem of weak growth. There is also, as most people in business now recognise, the pressing need to do more about climate change, and the environmental impact of fast-rising Chinese and Indian energy demand.

Oil prices dipped back below $60 a barrel last week but could yet go higher. The Basle-based Bank for International Settlements, the central bankers’ club, warned in its annual report last week that the consensus may have underestimated the effect of high oil prices and that further increases could do a lot of damage. That was not its only concern.

“A return of unusually low long-term interest rates to more normal levels could curtail spending by households,” it said. “Moreover, there has been little progress in tackling internal and external imbalances. Household debt has continued to rise and savings have declined in many advanced industrial countries while fiscal deficits have remained high. The reduction of current-account imbalances, which have widened further since the beginning of the year, remains a big global challenge.”

Here in Britain, it seems, many of those factors are coming together to give us decisively slower growth. Last week’s revised gross domestic product figures for the first quarter were a shocker, showing growth down from 2.7% to 2.1%. Gordon Brown’s growth forecasts have escaped, Houdini-like, on several occasions when all seemed lost. There can be no escape this time. The Treasury forecast of 3% to 3.5% growth will not be achieved.

Nobody would suggest that the G8 should focus its discussions this week on the death of the British consumer. But weaker growth for the UK economy is part of a wider global malaise. Curing the world’s problems is a lot easier when economies are growing robustly.

It is worth recalling what the leaders who attended that first summit at Rambouillet said in their declaration. The discussion was heavily economic in nature, focusing on the need to respond to high energy prices, control inflation, cut unemployment and contain global economic imbalances.

It also called for a renewed impetus in cutting trade barriers, something that was soon achieved. It also recognised the symbiotic relationship between rich and poor countries. “Sustained growth in our economies is necessary to growth in developing countries; and their growth contributes significantly to health in our own economies,” it said. What was true then remains true now.

Surely, however, it is good news that the G8 is getting to grips with the scandal of poverty in Africa? Well yes, but it is also quite painless. The centrepiece of this week’s announcement will be the cancellation of between $40 billion and $55 billion of the debt owed by up to 38 of the so-called heavily indebted poor countries, mainly in Africa.

That debt, of course, was always unlikely to be repaid. The issue, thrashed out at last month’s meeting of finance ministers in London, was who would pick up the interest bill on the debt, mainly owed to the World Bank, International Monetary Fund and African Development Bank. The hat was passed round, and everybody chipped in. But the sums are small — up to £530m spread over 10 years for Britain, and just over £900m for America. That, to finance ministers used to dealing in tens of billions, is loose change. Direct aid is also increasing but not in a way that threatens domestic priorities.

Whether giving Africa a huge amount more would do good or harm is open to debate. It would, however, have involved some hard choices. And that, more than anything, is what the modern G8 always avoids.

PS: How long before the first base-rate cut in this cycle? Last week’s grim reading from the CBI, which said retail sales last month suffered their worst year-on-year fall in the 22 years of its distributive trades survey, made the case for a cut as early as this week, as did that surprise downward revision to growth in the first quarter from 2.7% to 2.1%. Other evidence, including May consumer-credit and mortgage approvals — with the Bank of England saying the latter were the strongest since last July — argued for delay.

The “shadow” monetary policy committee, like the actual MPC, is moving closer to a rate cut. Its latest vote, conducted for The Sunday Times, has three members in favour of an immediate lowering of rates, five for no change and one for a hike. Apart from the hike vote, the actual MPC, with two members already in the cutting camp last month, may split along similar lines.

The three cutters on the shadow MPC, which meets under the auspices of the Institute of Economic Affairs, are concerned about the slowdown in consumer demand, among other things. Roger Bootle, economic adviser to Deloitte, said the slowdown is “intense” and predicts a 3.5% rate (from 4.75% now) next year. Patrick Minford of the Cardiff Business School said spending weakness has “made in Threadneedle Street” stamped on it, while Peter Warburton of Economic Perspectives cites evidence of a deceleration in activity on several fronts.

The five “no change” shadows — Kent Matthews, David Smith (no relation), Andrew Lilico, Anne Sibert and John Greenwood — have all to be persuaded of the need for lower rates, emphasising continued strong money-supply growth. For this reason Gordon Pepper of Cass Business School votes for a hike.

What will the real MPC do? Probably not much this week, although the chances of a cut are growing and would not be a huge surprise. August, when the committee has the benefit of a new set of economic forecasts, still looks a better bet.

From The Sunday Times, July 3 2005


In all this clanour for a rate cut, which will grow houseprices further, what has happened to the economists - Patrick Minford famously amongst them, who used to cite double digit money growth as occuring now as the key predictive measure of an economy?
Where is the input of the monetarist economists now.

Was moeytarism just a mirage?

Posted by: Tony Hanlon at July 3, 2005 04:28 PM

I've never understood why Russia is a member of the G8.

If the G5 (as it was in the 1970's) was founded to discuss economic issues, amongst the world's leading economic powers, then Russia cannot be considered a leading economic power. Russia's GDP equates with the Netherlands or Australia. Should those nations be invited to the G8?

If anything, China's status as not being a liberal democracy is of no relevance. It is a country that 'matters' economically. It should be a member of the G8, ahead of Russia.

Posted by: Chris A at July 3, 2005 06:40 PM