They might be better off playing some golf because they need to do a bit of bonding. The G20 is much more representative of global economic power than the G7, and so deserves a welcome, but it has two practical disadvantages. One is that getting agreement among 20 people is much harder than among seven. The other is that these are very disparate nations, whose only common link is that they are important economies. They have a common interest in ensuring that world trade and economic growth continue in a sustainable way, but that is about it. What India wants is different from what China wants; South Africa’s objectives are quite different from those of Indonesia.
Further, this group is only a year old, the ministers don’t know each other, and it will take a while for everyone to figure out quite what it can usefully do. That one of its earliest tasks has been to co-ordinate policy on bank bonuses demonstrates how it is easier to focus on a peripheral issue than a mainstream one. The mainstream one that matters most is how to extricate the world from the artificial boost to growth, from increased government borrowing, and from unconventional monetary policies. It is a question of getting policies, which in any case are unsustainable for much longer, back to some semblance of normality without clonking still-fragile world growth on the head. But here the performance of the major economies has been so very different that it raises huge questions as to what sort of co-ordination is appropriate.
The best perspective on this, I usually find, comes from Goldman Sachs’ Brics work ? the clever acronym of Brazil, Russia, India and China. Just to remind you, Goldman constructed a growth model demonstrating how the Brics were likely to overhaul the G7. As you can see in the main graph, by 2050 China is likely to be by far the world’s largest economy, and India number three. The most recent Goldman estimates have China passing the US around 2027 ? less far in the future than the fall of the Berlin Wall was in the past. Stop and think about that one.
Interestingly, that would not require the present headlong rates of growth in China to continue. Goldman reckons rates will come down sharply, but a combination of decent growth plus currency revaluation will drive the advance. China, by the way, passes Japan to become the world’s second-largest economy this year or next. That is because the downturn has speeded up the shift of power. With China growing by around 9 per cent this year and India by 6 per cent, it does not take long for them to overhaul developed countries shrinking by between 3 per cent and 6 per cent. What is remarkable, though, is just how dominant Chinese consumers have become in the past year. Chinese motorists are buying more than a million cars a month and have raced ahead in their spending as US consumers have pulled back.
By now, most of us are at least vaguely aware of what is happening but there seems to be a gap between what our brains tell us and the practical consequences of this shift of power. This will show through in a host of different ways, some of which are already evident.
One issue is particularly relevant to the London economy. It is the extent to which financial-services business is moving to the Asian time zone. If the world’s largest economy is going to be China, the world’s largest financial centre is going to be either Hong Kong or Shanghai ? or a combination of the two. It is a straw in the wind that HSBC is moving its chief executive to Hong Kong, recognising that its main business will be in Asia. I would not be surprised were the bank to move its legal HQ back to Hong Kong within the next few years too, particularly if China decides to establish a record of legal, tax and regulatory predictability. I would be even less surprised if a lot of British financial talent moves to Hong Kong in the next few years: talent both follows business opportunities and generates them.
This should not make us despair, however. It will be a rebalanced world, sure, but London is likely to be more successful at retaining some international financial business than New York for two main reasons.
One is simply time zone. We are lucky here. A small overlap between Europe and East Asia lets those in Hong Kong have a conversation every afternoon with people in their offices in London. Talking with New York in business hours is impossible.
The second is that we have had to learn how to look outwards since the demise of sterling as an international currency, and hence developed the Eurocurrency markets. We are going to have to do that more than ever from now on, because the opportunities within this time zone are going to be pretty limited in this coming economic cycle. Financial business will remain Asia-oriented, but some subsidiary stuff can be done from the UK.
It is not the job of this G20 meeting to try to choreograph the shape of the international financial services business. However, one of the lessons that we have all learnt in the past year is that if you want economic growth you have to have a competent and well-capitalised banking system to help fund it. But in the coming months, the focus will shift from bailing out banks to finding ways of enabling firms to raise finance from the markets as well as the banking system. Most of the world’s savings are being generated in Asia so it would be natural for the Asian members of the G20 club to work on ways of fostering that.
There is a further point to be made about the G7 and the Brics. It is that a lot of us throughout the developed world still have an “us and them” mindset ? I am as guilty as anyone else. It is convenient to think in those terms because it highlights the shift of power. But actually, we are all in this together, as the structure of the G20 acknowledges. World trade and investment benefit just about everyone, as all but the most blinkered now appreciate. (To put the point in reverse: everyone acknowledges that recession has hurt just about all of us, and if you accept that, it follows that growth must help just all of us too.) So a bit of time melding the ideas from the different countries represented at St Andrews must be a weekend well-spent. Don’t expect too much ? that would be naive. But don’t dismiss it as a talking shop.
SO IT’S GOODBYE TO QE, PROBABLY, AND IT’S WORKED BETTER THAN SOME THINK
If you find your mind glazing over when you hear the expression “quantitative easing”, join the club, though I have worked out a way to remember how to spell it ? think “tit before tat”. Still, the good news is we have almost certainly come to the end of the process. As we heard last week, the Bank of England is to buy another £25bn of government debt, putting the total at £200bn, but, though it did not say so, it seems to be generally accepted that this will be the end of the line.
The Bank will have pumped in the cash equivalent of around 15 per cent of GDP and while I know a lot of people argue it has had little effect, that seems to me to be wrong. We cannot know what would have happened had the Bank not done this, and it is hard to separate QE from other expansionist actions. But while the impact on money-supply growth and corporate credit look muted, there was a fall in gilt yields and a boom in corporate bond issues. The rise in share prices has also revived rights issues. So despite flat bank lending, large firms have been getting funds. Finally, output seems to be rising, as far as we can say anything sensible about that, given the poor quality of the data.
On that point, we will get more of a feeling for what the Bank thinks this week in the November Inflation Report. This will be the last significant official information until the new Treasury forecast with the pre-Budget report. There are two things to look for. One will be any comment about the past. Because a lot of economists think official statistics underplay economic activity, it would be good to see whether the Bank economists support this view. The other thing will be any shift in the projected profile for growth, as shown in the famous fan charts, in particular whether there is any upgrading from the past set. We are going into an intensely political few months and it is no criticism of the officials to say that the Bank’s forecasts will carry more credibility than the Treasury’s. If the Bank thinks growth really has restarted that has big implications for next year, and not just for the fate of QE.
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