IT OUGHT to be good news that leaders from the Group of Seven (G-7) are gathering for a retreat on the Bay of Biscay as the global economy slows, trade wars escalate and major economies like Germany slide toward recession.
But the allies are so divided that they may squander the chance to find a solution.
At any other time in history, the expectation from such a summit would be for a coordinated response to loosen fiscal purse strings and walk away from protectionism – an approach that came out of similar meetings called to respond to the far more dire global financial crisis a decade ago.
This weekend, as France’s Emmanuel Macron hosts leaders including the UK’s new prime minister, Boris Johnson, along with US President Donald Trump, disagreements over everything from Brexit to the future of the global trading system will likely stand in the way of unified solutions.
The best economic hope for the meetings in the Atlantic port city of Biarritz may be that divisions don’t get any worse, and that central bankers conducting their own retreat some 8,050 km away in Jackson Hole, Wyoming, save the day.
Driving that reality is Mr Trump’s world view, which isn’t showing any signs of changing.
The broad consensus from economists and other G-7 leaders is that the global economy would benefit most from an end to his trade wars. But the US president has dismissed accusations that his tariff assault on China and threats to impose duties on Europe’s auto industry are contributing to any slowdown.
Moreover, rather than seeking harmony, he is threatening to turn his trade wars into currency wars.
“Fight or go home!” he told the Federal Reserve in a tweet Thursday, in which he bemoaned negative yields on German bonds and a strong dollar that he views increasingly as a threat to US growth.
Ahead of this weekend’s meeting, Trump administration officials insisted that the US economy and the president’s agenda of tax cuts, deregulation and crackdown on unfair trade ought to be envied rather than scorned, particularly in Europe where growth has slowed.
And they are travelling to Biarritz with an ask for Germany’s Angela Merkel: to boost spending to head off a recession. Germany has taken tentative steps toward fiscal stimulus, but so far the government is sticking to its zero-deficit principle.
Some Trump aides argue that concerns over the global economy are overblown, thanks to the policy responses from the European Central Bank (ECB) and others that are already underway, especially if those are paired with German fiscal action.
Peter Navarro, one of Mr Trump’s closest advisers on trade and economic policy, said: “A stronger Europe will mean stronger demand for US exports and more rapid US growth.
“Such bullish help appears to be on the way with near certain ECB rate cuts, an increasing likelihood of German fiscal stimulus, and a possible resolution of Brexit, which will both remove Brexit uncertainty now suppressing some investment and clear the way for a possible UK-US trade agreement.”
Bold action by the Federal Reserve, such as a 100-basis-point cut in the target rate sought by Mr Trump, would bolster the US economy and the world’s too, Mr Navarro said. “Such a move is intended to shift the US from “good growth in the 2 per cent range to great growth in the 3 per cent range”, he said, rather than reflect any fears of recession.
Mr Navarro, a long-standing critic of Germany’s economic policies, is far from alone in viewing German fiscal stimulus as one of the keys to a global turnaround. Yet the push also highlights that the biggest division inside the G-7 over how to respond to a slowing world economy lies between Mr Trump and Mrs Merkel.
While the Trump administration would like to see a bold German move to abandon its obsession with balanced budgets, in Berlin there isn’t much appetite to cough up cash to help prevent a global slowdown they attribute in part to Mr Trump’s trade wars.
The German government isn’t ready to commit to meaningful stimulus at home or at the G-7. Nor is it in much of a hurry. Spending money now, when factory utilisation is still rather high, would simply stimulate imports or savings rather than domestic output, the argument goes.
Contingency plans are being drawn up and Mrs Merkel has talked about “clouds” darkening the economic outlook, however. Finance Minister Olaf Scholz said that, in principle, Germany could muster some 50 billion euros (S$76.4 billion) in times of a crisis, and the German government is aware that the ECB has limited room to respond and that a hard Brexit could tip the balance toward more rather than less action.
The UK, like Germany, is at risk of slipping into a recession after recent data showed a second-quarter 0.2 per cent decline in gross domestic product. But Mr Johnson’s month-old government echoes the US view that delivering Brexit come Oct 31 will end the uncertainty that has shadowed the UK’s economy and boost growth.
In Japan, preparations are underway for an increase in government spending to counteract an October sales tax increase. Finance Minister Taro Aso also signalled Tokyo’s readiness to deploy further fiscal stimulus if it was warranted after a G-7 ministers meeting in July.
Kyohei Morita, chief Japan economist at Credit Agricole Securities Asia, said: “Along with Germany, Japan is likely to add momentum toward fiscal policy in the global economy.”
But there are still questions over whether Japanese households can withstand the tax hike. A similar increase in 2014 triggered a sharp contraction and this time, foreign demand is unlikely to provide a buffer. Japan’s exports have fallen for eight straight months, thanks to the Trump trade wars and reduced demand from China.
That’s one reason the US position and the damage being done by its trade battles is what worries some economists most. With the International Monetary Fund predicting global growth of 3.2 per cent this year, a downgrade that nonetheless remains broadly in line with trend, and unemployment at record lows in many G-7 economies, there are reasons to be hopeful. That doesn’t reduce the risks, however.
Torsten Slok, chief economist at Deutsche Bank, said: “You do ask the question, ‘What’s the panic?’ Why are central banks looking to lower interest rates?
“The answer is that the trade war continues to linger and continues to be a huge cloud hanging over the global economy.”
Years ago, leaders had been able to find consensus to boost the economy. As the global financial crisis grew in 2008, then President George W. Bush called an emergency G-20 meeting at which leaders agreed to a roadmap to combat the slowdown.
That November 2008 summit was followed by others at which the world’s leading economies agreed to avoid protectionism and to other coordinated actions widely seen as having helped avoid a deeper downturn.
Some attending this weekend’s G-7 summit appear determined to press their case for Mr Trump to at least modify his tactics in his bid to rebalance global trade.
European Union officials say Donald Tusk, who will be the bloc’s chief representative at the meeting, will argue trade tensions are the single most important factor impeding global growth.
So too will Canada’s Justin Trudeau, who is intent on selling himself as a vocal advocate of pluralism and multilateralism, with an election just weeks away.
“Our government has responded to this new world by rejecting populism,” he said in a speech this week.
Saying his message would be clear, he added: “We need to build a future where everyone can benefit from economic growth and where we invest to help the middle class.” BLOOMBERG