Sunday, April 05, 2009
G20 gives us less reason to wallow in the gloom
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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So what is the verdict on the G20 meeting? Now that the international caravan has moved on, will we look back on it as a triumph, a turning point, or a strange little footnote in economic history?

Last time I was at the Excel Centre in Docklands it was for the motor show. Next year's has been cancelled because of the grim state of the global car industry. The question is whether the results of the G20 meeting will lift the black clouds.

The first thing to say is that Gordon Brown had a much better week hosting the summit than many expected. The idea that it would be a disaster was always a bit far-fetched, and so it proved. The praise from other leaders was genuine. If he was born for anything, this was it.

He was helped out by the flow of economic data and by the OECD (Organisation for Economic Co-operation and Development). The prime minister knows the recession may be his political undoing. But he also knew that most gathered round the table, certainly from western economies, were suffering similar, or worse, traumas.

Self-flagellation is one of our favourite pastimes. Something deep in the national psyche makes us want to wallow in the gloom. Being so miserable keeps us going.

But the OECD scotched the "Britain is suffering worse" myth. It said last week that Britain's recession, while serious, is far from the worst even among the big economies. Compared with the OECD's predicted drop in UK gross domestic product of 3.7% this year, four of the older G7 grouping are predicted to do worse — Japan (down 6.6%), Germany (5.3%), Italy (4.3%) and America (4%). Only France, down a predicted 3.3%, and Canada, 3%, fare better.

True, Britain's budget deficit is forecast to move much higher, to 10.5% of GDP next year. But this is less than America, 11.9%, and not dramatically above the OECD average of 8.7%. UK unemployment will remain below OECD and eurozone averages.

This is not, of course, a race to the bottom or a "your recession is bigger than mine" competition. But Brown would have found it harder to exercise his authority if Britain really was the sick man of the global economy. It also underlined the basis of the G20 meeting, which was that a dramatic synchronised global downturn demanded co-ordinated global action.

Did we get it? Having witnessed many damp squibs, and with the proviso that no single gathering could save the world economy, this one went further than most.

A $5 trillion (£3.4 trillion) fiscal stimulus is a lot of money, nearly a tenth of global GDP, even though none of it was new and most comes in the form of so-called "automatic stabilisers", the natural tendency for public spending to rise and tax revenues to fall in a downturn.

More impressive was the G20's ability to put together a $1.1 trillion package, separate from the fiscal stimulus. It consisted of a trebling of the International Monetary Fund's resources from $250 billion to $750 billion, a $250 billion allocation of IMF special drawing rights, in effect new reserves, which will allow emerging economies to survive damaging short-term capital outflows; $100 billion in new loans for the developing world, and $250 billion of new export finance to offset the credit crunch's damaging impact on world trade.

That part of the package did two things. It provided reassurance that the IMF has the resources, as do its most vulnerable members, to prevent a domino effect, in which instability in one country leads on to others. Eastern European economies were most vulnerable to these crises of financial confidence, but so were others.

A direct injection of trade finance, while small in the grand scheme of things and too late to reverse this year's dramatic contraction in world trade, was also a significant step in the right direction. Trade has become one of the credit crunch's most worrying casualties. Not all of this is hard, immediate cash but it represented good progress, particularly on IMF resources.

And there was more that was encouraging. Bank toxic assets remain a problem but countries are dealing with them, subject to domestic constraints. The G20 was never going to wave a magic wand to cure global imbalances but the recession is doing some of that, with China focusing on domestically generated growth and America's current-account deficit coming down.

Nobody would have wished for this global recession but it is possible that Brown's "new world order", if it means honest financial services, a genuine clampdown on tax havens and proper regulation of shadow banking, including hedge funds, will give us a global financial system built to last.

To the extent that the crisis has also shifted the global balance of economic power, which it has, that also represents a welcome change. Twelve members of the G20 would not have been allowed anywhere near the top table two or three years ago.

What does it mean for the immediate outlook? Forecasts are just forecasts. The interesting question is whether the recession's deadly grip is starting to ease.

The past few days brought a flurry of news that does not suggest the recession is over but implies an easing in the pace of decline. An improvement in the purchasing managers' index for manufacturing was followed by one for services.

Bank of England figures showed mortgage approvals rose to 37,937 in February, up 39% on November's low point. It is too soon for house prices to be rising, so Nationwide's 0.9% March increase was taken with a pinch of salt, and countered immediately by Halifax's report of a 1.9% fall. But Nationwide broke a relentless downward trend.

Perhaps the most encouraging development was deep in the money-supply numbers. "Broad" money, M4, adjusted for holdings by financial companies, slumped in the wake of the Lehman Brothers collapse. Its three-month annualised growth rate was negative by 5% at the end of last year. Now it has risen to an annualised 10%, even before quantitative easing. The Bank's own credit-conditions survey showed signs of a thawing of lending.

We are not through this yet. The Treasury is about to slash its forecast and thinks the first quarter will have been at least as bad as the final three months of last year, when GDP fell 1.6%. The chancellor's best guess is that we won't see growth again for another three quarters, and it will take longer before people notice it.

However, amid the gloom, one or two positive signs have started to appear and they need to be carefully nurtured. In combination with the G20 outcome, they suggest we can at least begin to hope again.

PS: What does the monetary policy committee, which meets this week, do now? The answer, according to the shadow MPC, is fret about the longer term. The shadow MPC, under the auspices of the Institute of Economic Affairs, says that at 0.5% the Bank has reached the limit of rate reductions and should press on with quantitative easing.

The shadow MPC is concerned about whether the Bank will be as bold tightening policy as relaxing it. One of its members, Peter Warburton, thinks it should aim for a 2% Bank rate by Christmas.

The shadow MPC's bigger worry, however, is about fiscal policy. Kent Matthews points out that for every 10 jobs created by fiscal expansion in the 1930s, nine were lost in the private sector.

Permanently expanding the public sector "crowds out" the private sector and leaves a legacy of over-regulation, weak productivity and low growth. An exit strategy for fiscal policy is as important as for monetary policy.

From The Sunday Times, April 5 2009