Heads of state and their entourages are heading to Seoul this week for the fifth G20 Summit on November 11-12, amidst rising tensions over the future of the world economy. The mood promises to be very different from last year’s Pittsburgh summit which saw leaders make an unprecedented commitment to work together to promote “strong, sustainable and balanced growth”. Currency wars, protectionism and the reality (or not) of global co-operation will be sharply in focus in the next week, with potentially significant consequences in the longer-term.
Last year’s pledges to address global economic imbalances were made against a backdrop of worldwide recession. Today, many countries are experiencing economic recovery and the focus has shifted from a global agenda to a more national one, as the continued fragile state of advanced economies in particular focuses politicians on domestic issues. Unfortunately, these cannot be addressed in isolation as the world economy is interconnected.
So we have a situation where reality is impeding popular national sentiment. Faced with demands to address high unemployment and weak growth, countries running large deficits, including the US and UK, are trying to increase exports while ensuring domestic goods are priced competitively versus imports. However, the promises of the big exporters, particularly China and Germany, to stimulate domestic demand and export less have not materialized to the extent wanted by their trading partners.
The result has been rising tensions over currencies and trade with spectre of protectionism yet again rearing its ugly head in many countries. Opening shots in the so-called “currency wars” have been fired for some months now, with China accused of dragging its feet in revaluing the yuan to a level where other countries’ (notably the US’) exports become more competitive. While the Chinese have stepped up their efforts, the yuan remains pegged to the US dollar at roughly the same level as four years ago.
Now there is a new target for the global currency rhetoric: the US. Last Thursday, the Fed announced an additional US$600bn of quantitative easing measures over the next 8 months to ensure continued confidence in the recovery. This is a relatively small injection of liquidity into an economy with some US$ 8.7 trillion of money supply. However, given that the US controls the global reserve currency in which some two-thirds of global currency reserves are held and all commodities are traded, the fact that the Fed is printing money could be interpreted as a warning shot to all the countries tempted to unilaterally engage in competitive currency devaluation – “we can do it too, and we have more clout”.
With the G20 summit looming, this interpretation was clearly made. The dollar fell sharply, Brazil bought dollars, Germany accused the US of breaking its strong dollar policy, and a member of China’s central bank called the plan “abusive.” While some of the geopolitical belligerence has subsided a little since the Fed’s announcement, the stage is set for tough talking when the G20 leaders gather. Headline items on the agenda include signing the agreement on the new Basel III rules on banking capital, liquidity and leverage, plus making progress on additional safeguards for “strategically important financial institutions” (SIFIs), the banks “too big to fail”. The topic of currencies, trade imbalances and protectionism, including a proposal by the US to set current account balance targets, will though overshadow the new financial rules.
Where does this leave businesses? It is too early to speculate on possible outcomes, but key areas to focus on include the implications of:
- Agreement – or not – on addressing global imbalances, which will impact the competitiveness of goods and services, currency volatility and the presence of trade quotas and barriers
- Global economic cooperation – or not (note Dominique Strauss-Kahn, head of the IMF, has said the momentum for economic cooperation is decreasing), which will impact global economic stability and continued economic recovery
- Continued tensions between the “powerhouses” of China and the US, which could have geopolitical as well as economic impact
- A weakened Barack Obama after last week’s mid-term election defeat, which could impact perceptions (and realities) of US power on the global stage and its ability to address the economic as well as other pressing global issues.
Whatever the outcomes of the talks, businesses should be prepared for greater uncertainty and volatility. Even when global agreements are reached, history suggests the biggest challenge has been driving these through to implementation. We will be watching the communiqués (and side negotiations) with interest so look out for future posts – and let us know your views.