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Summary

• China has assumed the rotating presidency of the G20 at a time when the outlook for global growth has weakened and some emerging markets face serious difficulties. This presents policy challenges for China, but also provides opportunities for the country to show leadership on global economic issues.
• The world economy grew by just over 3 per cent last year, its slowest rate since the depths of the crisis in 2009. Many emerging markets (including China) are slowing, and some (in particular Russia and Brazil) are in recession.
• Several factors are compounding these problems. Low commodity prices are having a negative impact on global growth. Financial market volatility is making companies and consumers cautious about spending, and the risk of further financial disruption is increasing. Geopolitical pressures are rising, and political populism is visible in many countries.
• Possible explanations for the slowdown include ‘secular stagnation’, post-crisis deleveraging, and the effects of emerging markets transitioning from export- and manufacturing-led growth. Low growth could become the ‘new normal’ for the world economy.
• In response, policies need to be more supportive of growth. G20 ministers and central bank governors have pledged to use all tools of economic policy – structural reforms, monetary expansion and fiscal stimulus – to boost growth. But so far there has been little action.
• Structural policies are important for boosting growth in the longer term, but they are unlikely to have the desired effect in the short term; it is not the priority at present to boost supply when there is a global shortage of demand. Monetary policy may also have neared its limits in terms of stimulating growth, with interest rates turning negative in some countries and quantitative easing becoming less effective. Moreover, easy monetary conditions could raise financial stability concerns in the longer term.
• There is a strong case for more activist fiscal policies, especially to boost investment. Some countries have more room for fiscal expansion than others, but a concerted move to provide stimulus – coordinated by the G20 – would minimize the risk of adverse market reaction and have a bigger effect on growth.
• A more effective and fully financed global safety net is needed to reduce risks globally; work needs to start on a longer-term mechanism for allowing countries in crisis to restructure their debts. Financial risks, both country-specific and cross-border, also need to be addressed.
• The G20 is the best forum for taking forward all these issues. Much rests on the incumbent presidency country. China has its own domestic economic challenges to address, but a concerted programme of international action by the G20 would also help in this respect. China should champion agreement on a set of policies to boost growth. It should encourage the G20 to take action on financial and country risks. And it should lead by example, committing itself to ‘non-aggressive’ exchange rate policy, its own domestic fiscal stimulus and increased efforts to tackle problems in its financial sector.