As far as the future of the world economy is concerned, the G20 meeting in Hamburg has reminded us of one thing, told us one thing, and given us zero guidance on something else.
The thing we knew, or should have known, is where power is in the world. The meeting has taken place in Hamburg, the richest or second richest (it vies with Munich) city in Germany. The country is Europe’s most successful economy, with the largest trade surplus in the world. Yet if you follow the tone of the debate, Germany was not the leading voice. The US and China were.
Germany is great at selling things to the rest of the world, but the terms on which those goods (and it is mainly goods, rather than services) are traded are defined by the US and China. Indeed, the huge German trade surplus is almost a handicap. Germany does not want to talk about it too much in case people start to ask whether the country is playing fair by exporting goods off the back of a relatively cheap euro but restricting imports of foreign services, including financial services.
So the key debate was between the leader of world’s largest economy and the leader of the second largest economy, between the old developed world and the new emerging world. The decision to create the G20 back in 1999 to give a voice to the emerging economies, which were not represented in the G7, has been amply vindicated. About two-thirds of the additional global wealth generated since 1999 has been generated by these “new” countries – new in inverted commas because they are not new at all; we are the upstarts. But also remember that the Chinese and Indian economies were far larger than those of the West until 200 years ago.
The thing we were told is that the G20 nations, taken as a whole, remained committed to an open world economy. It is, in a way, strange that we should need to be told that, but there has been mounting opposition to an increasingly open economy, dubbed globalisation, from all shades of political opinion. For the political left, this open economy is seen as exploiting the poor. Look at all those demonstrations. For the right, it is poorer nations such as China and Mexico, exploiting the markets of rich nations and putting their people out of work. Look at the pitch of Donald Trump.
The meeting was not all sweetness and light, but the big message than came over is that there will be no global trade war. If you look at the amount of international trade that takes place relative to the size of the world economy, it shot up until about five years ago. But since then the growth seems to have stalled. We are on a plateau and the question is whether we slip back or whether trading gets another boost. On balance, the evidence seems to favour a period of consolidation rather than restriction. The world as a whole, and particularly the emerging nations, should be glad of that.
So what about the matter on which we got no guidance at all? That is what will happen in the next stage of the economic cycle. That was because that is something over which the leaders of the main nations have no power. As they were meeting something was happening on the markets. Bond yields – long-term interest rates – rose sharply. It was a signal that investors have become increasingly convinced that the decade of ultra-cheap money is drawing to a close.
They have been nudging up for the best part of a year but now they seem to be moving faster. It is always hard to attribute reasons for anything in financial markets, for the latter are moved as much by emotion as logic. But there are a couple of specific explanations and a more general one.
The specifics were signs from the European Central Bank and, less importantly, the Bank of England that they were shifting policy; and strong job numbers in the US. The general explanation is that everyone knows that there is still a business cycle and anyone who pretends it does not exist or has been eliminated gets egg on their face. Remember how poor Gordon Brown thought he had ended boom and bust?
At some stage in the next few years – maybe as soon as 2018, maybe as far away as 2022 – there will be another global recession. We don’t know when and we don’t know how serious it is going to be. But we would be mad not to expect it sooner or later. The countries that comprise the G20 generate 80 per cent of world output. They run the show. But they are all subject to the cycle – you could say prisoners of it.
There was nothing of that in Hamburg, no acknowledgement even that the cycle exists. I suppose that is understandable if what will happen is beyond your power to do anything about it. But the rest of us need to be aware that the markets are signalling that the recovery is now solid enough to cope with a return to more normal interest rates. That’s good. A solid recovery is better than a weak one. But nothing is forever, and this recovery is already getting a bit long in the tooth.
Join our new commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies