ECONOMETER

As usual the G20 meeting delivered little for markets to get their teeth into but there could be some important implications going forward.   Firstly, the elevation of the role of the G20 meetings in economic matter compared to the G8 means that emerging market economies will finally have a stronger say in economic policy co-ordination.  The “framework for strong, sustainable and balanced growth” ought to ensure a broader planning that is not dominated by just a few countries. 

It is not entirely surprising that G20 officials have committed to maintaining expansive fiscal and monetary stimulus until recovery looks more sustainable, but it will come as a relief to markets that officials are not going to prematurely reverse such policies and hit growth just as it gets going.  The risk of course is that both fiscal and monetary policy is left too lose for too long, fuelling potentially significant inflation pressures. 

To counter market concerns about inflation getting out of control some officials are already indicating that markets will have to start contemplating a reversal of policies. Fed Governor Warsh noted that the Fed may need to be as aggressive in reversing policy as it was in implementing it whilst ECB member Mersch highlighted “timely preparation” about when to raise rates and withdraw liquidity.  

Getting back to the G20, the focus on more balanced growth, with savings surplus countries, namely China, Germany, Japan and oil exporters pushed to increase domestic demand whilst debtor countries including the US, urged to reduce fiscal and current account deficits, will go a long way if implemented to correct global imbalances.  However, one of the key adjustments that will need to be made is a weaker dollar, especially against Asian currencies, but there is no mention of this. 

Instead, US Treasury Secretary Geithner reiterated the familiar US “strong dollar” stance, but officials in other countries are unlikely be particularly supportive given the growing calls to replace the dollar as the world’s foremost reserve currency.  A weaker dollar will be crucial in any rebalancing of the world economy given that it would reduce the purchasing power of US consumers and help to reduce the current account deficit.   

Whether central banks in Asia allow their currencies to strengthen against the dollar and really support a global rebalancing is another matter.  It could be a long time before global rebalancing becomes a reality.  A weaker post crisis US consumer will help but currencies will also have to play their part in the rebalancing game.