G-20 Clash Over Recovery Risks ’sub-Potential’ Growth

¹²G-20 Clash Over Recovery Risks ’sub-Potential’ Growth (Update1)

By Simon Kennedy and Mark Deen | 8 June 2010

June 7 (Bloomberg)— Global policy makers are starting to clash over their individual prescriptions for recovery as Europe demands lower budget deficits while the U.S. warns against pushing exports instead of domestic demand. At a meeting of Group of 20 finance chiefs in Busan, South Korea, June 4-5, Treasury Secretary Timothy F. Geithner said the world cannot again bank on the cash-strapped U.S. consumer to drive growth and urged other nations to stimulate their own demand. European Central Bank President Jean-Claude Trichet said fiscal tightening in "old industrialized economies" would aid the expansion by shoring up investor confidence.

Each strategy carries threats for the global rebound that the G-20 said faces "significant challenges." Continued stimulus risks bondholder revolt over rising debt burdens, while spending cutbacks could worsen unemployment. Relying on exports leaves the world prone to trade wars and competitive currency devaluations as countries seek to give their companies an edge.

"The world may end up in a period of sub-potential growth for two or three years," said Venkatraman Anantha-Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer & Co. in Singapore. "We need to accept that all of us cannot simultaneously grow our way out of trouble". The fragility of the recovery from last year's worldwide recession was evident as the G-20's finance ministers and central bankers gathered to shape the agenda for this month's summit of their leaders in Toronto.

Stocks Tumble

The Standard & Poor's 500 Index closed at a four-month low on June 4 after government figures showed U.S. employment rose less than forecast in May. The euro today fell to as low as $1.1889, its weakest level since 2006 amid concern Hungary is nearing a debt crisis. G-20 officials signaled deeper concern about the economic and fiscal outlooks than when they last met in April. In a statement released after their talks ended June 5, they promised to "safeguard recovery," yet replaced an endorsement of budget stimulus with a pledge to pursue "credible, growth-friendly measures to deliver fiscal sustainability". Countries can still fan domestic growth "within their capacity," they said.

Capital Standards

Officials separately targeted deadlines of November to design new rules to raise the quality and quantity of capital held by banks and December 2012 to introduce them. Chancellor of the Exchequer George Osborne was among those to say the process for enactment may be extended. A European and U.S. proposal to tax banks globally to cover the cost of bailouts was defeated.

Banks have warned that the capital proposals may impinge on credit and growth. UBS AG, Switzerland's biggest bank, has estimated the proposals may force banks to raise as much as $375 billion in fresh capital. In a sign of tension among the world's economic policy chiefs, Geithner flagged concern that others are turning to cheaper currencies and fiscal restraint, leaving their rebounds reliant on foreign rather than domestic buyers for strength.

"Stronger domestic demand in Japan and in the European surplus countries" is needed, Geithner said in a June 5 press briefing in Busan. "The value of the G-20 is to help each of us individually recognize the importance of economic policies that are in our broad collective interest". The conundrum is that governments are all trying to harness a rebound in trade, which the Netherlands Bureau for Economic Analysis last week estimated grew 3.5 percent in March, more than double February's pace.

Pernod, Toshiba

Companies from French beverage maker Pernod Ricard SA to Japan's Toshiba Corp. and Nissan Motor Co. are counting on foreign demand to stoke earnings. Pernod said last month that for every 1 percent drop in the euro versus the dollar, its earnings before interest and taxes rise 12 million euros ($15 million). Toshiba, Japan's biggest memory-chip maker, said May 11 it aims to quadruple profit in three years as foreign sales climb. Nissan, Japan's No. 3 automaker, the next day forecast earnings to more than triple in a year on North America and China sales. In the U.S., President Barack Obama aims to double exports over five years, while China is refusing to bow to international pressure to allow an appreciation in the yuan, which it has held at 6.83 per dollar for almost two years to help its exporters.

Japan's Kan

Japan's new prime minister, Naoto Kan, enters office with a reputation for favoring a weak yen after saying as finance minister that he wanted the currency to fall "a bit more." French Prime Minister Francois Fillon said June 4 the euro's drop below $1.20 is "good news" after a gain that was "penalizing our exports". Britain's Osborne said last week in Beijing he is "keen" to make the U.K. more trade-driven. "If everyone's expecting to export their way out of trouble, who will be buying"? said Alvin Liew, a Singapore— based economist for Standard Chartered Plc. "Countries may resort to inward-looking policies and protectionist sentiment."

China's Limit

At the same time, measures by Premier Wen Jiabao's government to slow the expansion and avert asset bubbles mean China's ability to pull the global economy will be limited, Stephen King, chief economist at HSBC Holdings Plc, said in an interview with Bloomberg Television today. "Where does demand stimulus come from— not from China, China has already been growing too quickly," King said. The upshot for a global economy chasing weaker exchange rates is a "zero-sum story," according to Michala Marcussen, head of global economics at Societe Generale SA in London. She calculates that while a 10 percent depreciation of the euro boosts euro-area growth by 0.7 percentage point, that is offset by weakness in the U.S. and China, leaving overall world GDP just 0.2 percentage point stronger.

Governments are looking overseas for growth because they need to pare fiscal deficits at home. The International Monetary Fund calculates the G-20 nations' budget shortfalls will average 6.8 percent of gross domestic product this year, up from 0.9 percent in 2007. "For the vast majority, addressing finances, budget consolidation, is priority No. 1," French Finance Minister Christine Lagarde said in Busan. "There are some voices, definitely a minority, that insist on the need to underpin growth". European officials said June 5 in Busan that budget tightening must come next year, while Geithner advocated a "mid-term" horizon for deficit reduction.

IMF Managing Director Dominique Strauss-Kahn said at a press briefing that a study by the fund showed fiscal consolidation, without market deregulations that would bolster domestic demand, could shave as much as 2.5 percentage points off global growth and cost 30 million jobs.

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