Mr. Sobel
 

By Mark Sobel

 

Leaders of the G7 (US, France, UK, Japan, Germany, Italy, Canada and the EU) will gather in Biarritz, France on August 24, for their annual summit. Expect a do-nothing affair, marked by notable absences.

The formal agenda will be replete with critical global topics, such as gender inequality and climate change, priorities for the French presidency.

But make no mistake. Nervousness and hand-wringing over the deteriorating global economy will dominate.

Recent global economic developments are a significant cause for concern. Already, the International Monetary Fund has marked down its 2019 and 2020 global growth forecasts to a modest 3.2% and 3.5%, respectively. More markdowns are expected, especially in the light of intensifying trade wars and, more importantly than the direct costs of tariffs, the steepening pall over global confidence and investment.

China – the world’s second largest economy – is not invited. But its economic performance will weigh heavily on the proceedings. China’s economy is slowing under the weight of last year’s deleveraging campaign, declining car production and the hit from US President Donald Trump’s trade wars. China’s sustainable growth rate is falling. The country accounts for around one-third of global growth, a smaller amount than earlier in the decade. A slowing China is a major knock on global growth.

The European G7 contingent will come to Biarritz in a dismal state. The odds of the UK withdrawing from the European Union without a deal have risen sharply. Both sides are increasingly hardening positions ahead of Halloween’s deadline. Italy is a perennial threat to global financial stability due to its high debt and low growth. The country is embroiled in a political crisis, which deepened following Prime Minister Guiseppe Conte’s resignation on Tuesday.

German Chancellor Angela Merkel will arrive a weakened leader in her twilight. Many fear the German economy is in recession, racked by persistent problems in the automobile sector, a declining manufacturing sector and low confidence.

The French economy is performing better than its neighbours, but beset by high debt, spending and structural unemployment. The gilets jaunes have underscored the limits to French President Emmanuel Macron’s ability to carry out further reforms.

Japanese Prime Minister Shinzō Abe remains ensconced. However, the latest flare up in tensions with South Korea, on top of global trade woes, threatens to weaken a less than vibrant economy. That the yen has risen amid a risk-off global economic environment adds to Abe’s perceived woes, just as he intends to pursue a consumption tax increase that will sap the outlook.

Last but not least, Trump will arrive amid mounting US economic uncertainty. The relatively closed and services-oriented US economy is performing well, notwithstanding this year’s expected slowdown as fiscal support wanes. Inflation is in line with the Federal Reserve’s 2% objective, unemployment is well below the non-accelerating inflation rate of unemployment, and domestic consumption has so far held up admirably.

But there is a souring mood. Manufacturing conditions are deteriorating and Trump is upping his trade war on China. US policy-makers are fretting about the spillovers from global developments, and stocks have declined amid an inverting to flat yield curve.

Hopefully the leaders will come together and find solutions. Germany could provide meaningful fiscal stimulus, but it so far appears wedded to its zero deficit ‘Schwarze Null’ policy despite recent rumours.

Prime Minister Abe seems intent on carrying through with the consumption tax increase, and there has been little recent discussion about further measures to mitigate its impact.

UK Prime Minister Boris Johnson might be persuaded to find a Brexit deal. Italian politicians could come together for the good of the country and step back from the knife-edge of instability. Europeans could work on a more perfect union, making progress on risk sharing and a centralised fiscal capacity.

The single best thing by far that could boost immediately the global outlook would be for President Trump to immediately end his trade wars.

But co-operative action unlikely to happen. It requires US global leadership, which is absent.

Instead, the G7 leaders will undoubtedly lean on another missing party – global central banks. Trump will continue to push the Fed to bail out the US economy from the very uncertainties created by his trade and currency wars. European eyes will fall on outgoing European Central Bank chief Mario Draghi for a glorious swan song. Though achieving Japan’s 2% inflation target is nowhere in sight, maybe there will be hope Haruhiko Kuroda, the governor Bank of Japan, can come up with new ways to provide accommodation.

Expectations for Biarritz should be extremely low. The G7, fooling no one, should at least be able to paper over gaping cracks and secure agreement on a communiqué this time around. One might also hope that the foie gras and Dom Perignon will be good.

 

Mark Sobel is US Chairman of OMFIF.