The global economy may be steady on its way to recovery, but prospects for growth aren’t looking so great.
At the G20 Leaders meeting in Hangzhou, China this week—apart from President Obama calling these “turbulent” times—leaders said the global economy is showing improved resilience but growth remains “weaker than desirable.”
A statement highlighting key points addressed in the meeting said, “Downside risks remain due to potential volatility in the financial markets, fluctuations of commodity prices, sluggish trade and investment, and slow productivity and employment growth in some countries. Challenges originating from geopolitical developments, increased refugee flows as well as terrorism and conflicts also complicate the global economic outlook.”
The plan, according to the leaders of 20 of the world’s major economies, is to “catalyze” new growth drivers, find new avenues for development and shift nations to more innovative and sustainable economies.
“We will pursue innovative growth concepts and policies by forging synergy among fiscal, monetary and structural policies, enhancing coherence between economic, labor, employment and social policies as well as combining demand management with supply side reforms, short-term with mid- to long-term policies, economic growth with social development and environmental protection,” the leaders expressed.
As part of the plan, fiscal policy will become more flexible, and tax policy and expenditure will be more growth-friendly. Relevant authorities are expected to consult closely on exchange markets to prevent “excess volatility and disorderly movements” in exchange rates. To encourage long-term growth potential, the nations will look to sustainably raise productivity and “expand the frontier of production.” But the key, according to the leaders, will be innovation.
A new agenda dubbed the G20 Blueprint on Innovative Growth will include policies tied to innovation, the new industrial revolution and the digital economy.
“We commit to pursue pro-innovation strategies and policies, support investment in science, technology and innovation (STI), and support skills training for STI – including support for the entry of more women into these fields – and mobility of STI human resources. We support effort to promote voluntary knowledge diffusion and technology transfer on mutually agreed terms and conditions,” the leaders’ statement noted.
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Ahead of the G20 meeting, the International Monetary Fund (IMF), said on its blog last week that beyond innovation and sustainability, “forceful” policies are in order if there are any hopes of evading a low-growth trap.
“The political pendulum threatens to swing against economic openness, and without forceful policy actions, the world could suffer from disappointing growth for a long time,” the post noted.
According to the IMF, 2016 will be the fifth consecutive year where global GDP growth was below its long-term 3.7% average, and 2017 looks likely to be the sixth.
“Not since the early 1990s—when ripple effects from economic transition caused growth to slow—has the world economy been so weak for such a long time,” IMF said.
And there are three main reasons for that weakness: many advanced economies are still plagued by crisis legacies like debt overhangs and impaired bank balance sheets; the longer demand weakness lasts, the more it threatens long-term growth; and slowing productivity and adverse demographic trends are weighing on potential growth.
What’s more, weak global growth coupled with increasing inequality has made for a political climate where reforms stall and countries focus on more inward-looking policies.
To escape from what could be a looming low-growth trap, the IMF said economies that operate below capacity need demand support, countries need real structural reform, trade needs to be reinvigorated and policies should ensure economic growth is shared more broadly.
With trade specifically, according to the IMF, barriers should be rolled back and costs reduced.
“It is easy to blame trade for all the ills afflicting a country—but curbing free trade would be stalling an engine that has brought unprecedented welfare gains around the world over many decades,” IMF said. “However, to make trade work for all, policymakers should help those who are adversely affected through re-training, skill building, and assisting occupational and geographic mobility.”