G20 struggles with sluggish global economy

Finance policymakers from the world’s 20 largest economies vowed on Saturday to use a series of policy tools to boost the global economy and avoid currency wars but failed to outline any concrete joint action.

The G20 group met in Shanghai seeking to address issues including volatile markets, slumping commodity prices and the UK’s potential exit from the European Union.

“For the members of G20, they should go bold, go broad and go together,” said Christine Lagarde, managing director of the International Monetary Fund, at a press conference on Saturday.

Instead, they ended up agreeing to press ahead with previous commitments, with a bigger emphasis on a combination of monetary policy, fiscal spending and structural reforms.

In its official communiqué issued on Saturday, the G20 group vowed to use all policy tools – monetary, fiscal and structural – individually and collectively to strengthen growth, investment and financial stability.

However, Germany’s finance minister Wolfgang Schäeuble warned against fiscal stimulus, notably government spending, and called for effective structural reforms.

“The debt-financed growth model has reached its limits. It’s even causing new problems … and zombifying the economy,” he said on Friday at a forum held by the Institute of International Finance (IIF) in conjunction with the G20 meeting.

Mulyani Indrawati, chief operating officer at the World Bank, said in a G20 panel discussion on Friday that the key challenge of such reforms was that costs were always immediate while the benefits were in the mid or long-term. She added that they could be unpopular with voters in the West. Meanwhile, Lou Jiwei, China’s finance minister, said such reforms could be held back in China by vested interests.

With global investors looking to the Shanghai meeting for reassurance and action, host nation China and other countries moved to reduce anxiety over market turbulence and currency volatility.

“The magnitude of recent market volatility has not reflected the underlying fundamentals of the global economy,” Lou said at a press conference at the conclusion of the G20 meeting on Saturday.

Finance chiefs agreed to inform each other in advance of major changes on policy decisions that could potentially lead to currency wars. Previously they agreed not to devalue currencies to gain competitiveness for exports.

There were some concerns of competitive devaluations, Jeroen Dijsselbloem, chairman of euro-zone finance ministers, told reporters on Saturday. “Once one country starts, the risk is very large that the next country will follow. Everyone was quite firm that we mustn’t go down that road,” he added.

Beijing, in recent days, has taken steps to improve communication on its economic and financial policies, including public speeches by officials at the People’s Bank of China and the ministry of finance, in an effort to reassure jittery financial markets that devaluation was not on its agenda.

“There is no basis for persistent [renminbi] depreciation,” Zhou Xiaochuan, the PBoC governor, said on Friday at an IIF conference.

While addressing market concerns, he said “short-term market volatility will give way to economic fundamentals. Market is sometimes more influenced by the short-term factors.”

On the fiscal front, finance minister Lou said China had ample room to widen its budget deficit this year to perk up growth, with details subject to approval during the annual meeting of the Chinese legislature in early March.

Participants from the IMF, the US and other countries appeared to appreciate China’s efforts.

“On the issue of devaluation of the renminbi, I think we heard ourselves loud and clear from the Chinese authorities that there’s no intention, no determination, no decision whatsoever to devalue the currency,” said Lagarde.

The IMF last month cut the global growth forecast for 2016 by 0.2 percentage points to 3.4% and said another downgrade is likely in the coming months.

Lagarde urged global policymakers to speed up promised reforms and take collective actions to boost the economy and restore confidence but pointed out she sees a renewed sense of urgency.

“There was a renewed sense of urgency and collective membership,” she said. “Members really know they don’t have much time left.”