Lifting global growth

Robert Fauver, former US sherpa, tells John Kirton, director of the G20 Research Group, how economic policies in Japan and the United States could set a strong example for other members and lift global growth prospects

What is the current state of the global economy?

We’re in a transition between a pretty solid year in 2018 and a somewhat weaker year now. It’s not clear that the weakness is widespread. There is no immediate fear of a recession or significant downturn. The Europeans have again failed to live up to expectations. The Chinese had a fairly significant slowdown in 2018, but it seems their economy will be back to a very solid performance. North America and Japan are not looking bad. The world economy will probably grow slightly slower, but hardly enough to be statistically significant.

The United States is in the middle of its best economic performance in a decade, maybe two. Unemployment is at historic lows. Investment will remain strong this year. There is a downside risk of a rising budget deficit, which leads to bigger debt. This overhangs the bond market and monetary policy. In part, the outlook depends more on political events than on economic ones. Continued disagreements with the Chinese over trade and the imposition of tariffs will feed back on expectations and the domestic economy.

What is the state of the Japanese economy?

Japan is holding firm at 1% of real gross domestic product growth. For Japan that’s good. With declining inflation, real growth is probably around 2%. With a declining workforce and an ageing population, 1– 2% real growth is not bad. For the 2020 Olympics, there will be an influx of tourism spending. The downside is again on the political side. If US-North Korea or US-South Korea talks go badly, that directly feeds back on confidence and expectations in Japan.

What about Japan’s debt-to-GDP ratio and the scheduled increase in the consumption tax?

I’m not worried about Japan’s sizeable national debt. It is not like that in the United States where China owns a significant share of our national debt. In Japan, 90–95% of the total bonds issued by the government are owned by the Bank of Japan. Raising the consumption tax a significant amount has been well anticipated. Japan is smart to raise it in what looks like a solid year.

How should the G20 leaders respond to the current global slowdown?

It’s so difficult for the G20 to come up with a single set of policy recommendations. It is very important that the advanced members set appropriate economic policies in their countries that will allow the less developed members room for trade-financed growth. Europe needs to focus internally to set the stage for better growth and more flexible economies. This will signal to Asia and Latin America that by introducing flexibility in their economies they too open the way for growth. That would allow for price flexibility and labour movement in various growing sectors. The United States needs to show the world it can control its national debt problems so they don’t turn into larger external deficits and larger national debts.

China has significant problems within its domestic economy, with underlying structural and financial market issues. It needs to focus internally, for itself and to provide an import market for southeast and northern Asia.

What about monetary policy for the world’s major central banks?

The Europeans were the last major central bank to move towards a zero interest rate policy and monetary easing. They then started to come off it late, and now they’re going back to it. The latest International Monetary Fund report suggests they need both monetary and fiscal easing at the same time. Japan has rightly come off easing by buying back bonds without a significant change in interest rates. The Bank of Japan has been able to modestly tighten monetary conditions without fanfare.

The United States has had more of a mix. Financial markets took a real hit and the Fed is leery about publicly talking about rising interest rates. But it’s not clear it has reversed course. That would imply easing.

What are you most worried about as the greatest risk to the global economy?

Two things. First, the state of trade discussions between United States and China. I’m well aware of the Trump technique to hit them between the eyes and then backpedal to end up with a compromise. However, that classic negotiating style upsets markets.

Second is the Chinese authorities’ mishandling of their economy. China is such a big part of the world economy, with very large and rising defence expenditures. It is now a bigger overall player in economic and strategic terms. If its economy comes off the rails, this will have significant spillover effects. Its lack of structural reforms means its labour market is messed up. The further in from the coastline, the worse the domestic imperfections and economic disparities.

There is a potential for rising social problems inside China that would have huge spillover effects on the rest of the world.