Monthly Archives: November 2014

G20 Battler

Heads of state from the world’s 20 largest economies are gathering this weekend in Australia for the annual G20 Leader’s Summit. Similar to its agenda last year, the summit will focus on policies aimed at encouraging faster and more resilient global economic growth.

We would welcome progress toward that end. Exhibit 1 shows the downward revisions to global GDP growth expectations for this year and next year. They follow the post-crisis pattern of growth below both historical average and initially forecasted rates.

Exhibit 1: Consensus Global Economic Growth Forecast
2014 (white) & 2015 (yellow)

Source: Bloomberg

Earlier this autumn, financial markets experienced a jump in volatility and decline in prices on growth concerns. With economic momentum in several major economies so low, investors became concerned regarding the outlook for earnings and the potential that deflation may arrive in Europe, as it has afflicted Japan over the last fifteen years. Only after assurances from the Federal Reserve, the Bank of Japan, and the European Central Bank that they remain committed to using aggressive monetary policy to stimulate inflation and financial markets did prices rebound and volatility fall back to historically low levels. A surprise increase in the Bank of Japan’s quantitative easing program and more explicit promises for the same from the European Central Bank have more than offset the end of the US Fed’s new bond purchases.

The world leaders at the G20 summit have their work set before them. They face the challenge of promoting growth in economies with elevated debt levels and less benefit from productivity gains. Structural reforms that improve labor market flexibility and improve infrastructure would be great places to start. Monetary policy has again bought more time, but it’s fiscal and regulatory policy that will make the difference in generating the improved growth that financial market valuations require.