G20 does little to remedy global economy

G20 finance ministers’ disagreement in Shanghai over the best way to stem the economic slowdown had a cascading effect across the universe as hopes pinned on the summit dashed, sending a negative message to the equity markets.
Despite being aware about the potential risks, the group’s communiqué did not include the call for coordinated action for which many had hoped. The G20 communique generally said the group “will use all policy tools— monetary, fiscal and structural — individually and collectively” to build confidence and strengthen the recovery. Of course, this is not happening. The summit was like a doctor who diagnosed the disease but fell short of prescribing the required medicines.
Investors everywhere are getting nervous. Even signs of the US’ slight growth do not seem to reflect optimism about the global economy.
In broader terms, fiscal stimulus plus reforms are among the main tools to foster competition, enterprise and employment — and can revive the flagging world economy.
To tackle the economic slowdown, governments ought to stimulate competition by cutting excessive regulation, especially of labour markets, and by renewing their efforts to lower barriers to trade and migration.
The governments should also cut public spending and forge partnerships with the private sector, especially in the area of infrastructure projects.
Trade agreements such as the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership should be concluded and put into effect to enhance trade.
It is worrying that the global markets are reversing two weeks of gains, following the G20 summit of world economic leaders.
Asian stocks broadly fell on Monday, with Shanghai ending at a month-low and Tokyo diving into the red after a G20 meeting failed to ease concerns about stalling global growth.
Chinese shares closed down 2.86 percent, after falling as much as 4.63 percent during the day, as traders remained unconvinced the G20 had promised enough to revive the world economy.
News the US economy grew faster than expected in the fourth quarter of 2015 boosted the dollar, following the release of US economic data last week. According to the report, the economy expanded by one percent in the final quarter of the year, up of its previous estimate of 0.7 percent.
Meanwhile, encouraging economic data out of the US has put the prospect of another Federal Reserve interest rate hike back on investors’ radars, even as the eurozone, China and other regions continue to struggle.
Without introduction of structural reforms, the global economic growth will continue to struggle. Should financial leaders fail to seize an opportunity turn around the current prospects of the economic slowdown, low growth could lead to recession.
Indeed, the G20’s call fell short to handle the risks facing the global economy. The communiqué lacked the urgency to address the current economic challenges. The ministers and central bank chiefs were not close to the landmark achievement in April 2009 in London, when an impressively coordinated policy approach helped avoid a multi-year global depression.
With the UK mulling spending cuts, Japan planning a sales tax increase, Germany’s finance minister warning debt-funded growth just leads to “zombifying” economies, and the US constrained by a Republican-controlled Congress, it may fall on China to ratchet up the fiscal firepower.
No doubt, investor hopes for coordinated policy actions. This dream was not addressed by the G20. Hence, countries and regional group should act immediately by focusing on the structural reforms and encourage partnerships with private sector over the public projects.
Tax cuts and investment in infrastructure could raise spending and expand productive potential at the same time. The IMF chief’s recent call for the GCC states to impose VAT and reduce public spending is a recipe to shore up the regional economies.