Of the G20 caravan, and short memories

G20 participants will return home from the photos to do what they already would have, now with added confidence. By the time they meet again, world growth could look quite different.

So the G20 finance ministers and central bank governors meeting in Sydney couldn’t quite bring themselves to endorse fully the IMF growth target.

In its report for the meeting, the IMF suggested that reforms would raise world growth by 0.5 per cent a year over five years - that is 2.5 per cent or $2.25 trillion. In the event they signed up for 2 per cent over five years and $2 trillion. Close.

Australian Treasurer Joe Hockey declared this to be “unprecedented” while US Treasury Secretary Jack Lew said it represented a significant change of tone for the G20, and took the opportunity to lecture emerging countries about getting “their fiscal house in order, to have their structural reforms in place.”

Well, this year’s communiqué was certainly a little better written than the last few but apart from the (partial) adoption of the IMF’s specific growth target, the message was much the same: more growth needed everyone; let’s pull together, and, er, separately.

The G20 caravan descends on a different, strutting, leadership country each year, spews out colossal volumes of blather about international co-operation and economic growth, and co-ordinates some photo opportunities before rattling off to the next destination. In between, the participants do what they were going to do anyway, secure in the updated knowledge that so is everyone else.

Yesterday’s communiqué will turn into the Brisbane Action Plan, which will update the St Petersburg Action Plan of 2013, which updated the Los Cabos Growth and Jobs Action Plan, which updated the Cannes Action Plan for Jobs and Growth.

Each of these “action plans” contained detailed commitments from each country over several years – as many as 10 years – but as far as I can tell the following year’s G20 meeting does not start with ticking off each country’s progress on its promises from last year.

Instead, each G20 seems to assume nothing has gone before; each year’s promises start again, fresh and bright.

Yesterday’s communiqué contained no detail of course: the finance ministers never do that because the leaders have to sign off on the detailed commitments in October, before the whole thing starts afresh the following February.

But there are no mysteries about what those commitments will be. Everyone knows what to do, and the IMF set it all out in its report for the Sydney meeting.

Five years since the Great Recession, wrote the IMF, output remains “far below” the long-term trend level, especially in advanced economies.

“In 2013, (per capita) output losses relative to trend amounted to 8 per cent for the G20 as a whole, with a higher loss in advanced deficit economies (11 per cent).

“The recovery has also been much slower than was anticipated in the wake of the crisis: the G20’s 2013 real GDP level was 2 per cent below the downside scenario projection prepared for the 2010 Mutual Assessment Process.

“The strong growth projected in 2010 was based on an expected rapid decline in unemployment, accompanied by a strong crowd-in of private demand, which did not materialise.”

The IMF decomposed the output losses into demand side and supply side. On the demand side, investment in G20 remains below trend by 18 per cent. Over the G20 as a whole, consumption is only mildly below trend, but this masks regional variations.

On the supply side the main driver has been a loss in productivity, followed by labour force participation and employment losses. Productivity accounts for 5 percentage points of the loss while the other two account for 1 percentage point each.

What’s to be done about it? Why, get productivity up and invest more.

The IMF prescribes what the G20 has been talking about the past few years and what most countries are trying to do anyway, for their own good: supply side reforms, with more competitive product markets; higher domestic demand in the surplus countries, China and Germany; increased infrastructure spending of 0.5 per cent of GDP; no “premature” tightening of monetary policy.

In fact the global economy seems to have started slowing again in the past few months, since the IMF produced its report for Sydney, with a slowdown in manufacturing output and retail sales volumes, especially in the US.

By the time they get to Brisbane, perhaps, she’ll be rising.

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