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As the London meeting raises hopes for solutions to the global economic crisis, recovery may already be stirring. Structural problems will persist
Unless U.S. President Barack Obama and British Prime Minister Gordon Brown manage to pull off some last-minute lightning, the save-the-world Group of 20 summit in grimy East London at an exhibition hall ordinarily used for boat shows probably won't offer many big achievements. On the summit's eve, the best outcome looks likely to be a soothing pledge by world leaders to continue efforts to turn around the ailing world economy. The gathered politicians may offer more detailed agreement in some areas, including a big capital boost for the International Monetary Fund, the need to impose stricter global rules on banks and other financial actors, and further tightening of the screws on so-called tax havens.
A few weeks ago, with expectations running high and markets in meltdown, such a minimal outcome might have been a disaster. Now, following a sharp runup in equity markets and some signs that parts of the world economy are improving—or at least getting close to a bottom—it may be less urgent for the G-20's presidents and prime ministers to reach sweeping agreements that were probably unrealistic anyway. "I think there is a little less pressure on these leaders to solve the world's problems than three or four weeks ago because the markets have a better tone," says Larry Kantor, head of research at Barclays Capital (BCS), the investment banking arm of the big British bank.
Kantor, who is based in New York, was recently in London somewhat warily unveiling a new volume of analysis called "Green Shoots Have Arrived." He acknowledges that the title seems saucy in the British capital, where economic gloom is de rigeur. Prominent Britons who now make the mistake of uttering the "green shoots" phrase—including Gordon Brown's key economic advisor, Shriti Vadera, who recently became a British minister—have been pilloried in the resolutely pessimistic local press.
Forecasting Positive U.S. GDP
Still, Kantor says that he sees signs that "the bottoming-out process has begun" in parts of the world including China, which he thinks has "turned the corner," and the U.S., where he thinks "consumption has stabilized," though at a very low level. His argument has three basic points: First, expectations have been battered down so low that they are now easier to meet or beat; second, whatever the criticism of the details, policymakers have deployed a huge amount of stimulus in the form of spending plans and rate cuts; and third, manufacturers have cut back so sharply in reaction to falling demand that they may well need to increase output soon—unless consumption takes another sharp leg down.
Kantor notes, for instance, that U.S. auto sales have fallen recently to a dismal 9.4-million-vehicles annualized rate (the old norm was 16 to 17 million), but car manufacturing in the U.S. has declined even further, to an annualized rate of about 4.5 million. "You can't keep producing half of what you sell," he says. "At some point you run out of product," Kantor says. All told, Barclays forecasts that real gross domestic product in the U.S. will turn positive in the fourth quarter of this year.
Kantor isn't alone in being cautiously optimistic. Michael Heise, chief economist at German insurance giant Allianz (AZ), opined on Mar. 31 that the worst of the downturn is likely over. Heise, like Kantor, partly bases his argument on the thinking that companies and economies eventually run out of downside. "The U.S. has been in recession for two years," he says. "Recessions come to an end at some point, and this one will, too."
Even in Europe, which many economists think will lag Asia and the U.S. in coming out of recession, there have been recent positives. In Britain, mortgage approvals for February showed the biggest jump in three years, indicating that the housing market may be starting to revive. The March British purchasing managers survey, out on Apr. 1, also was better than anticipated. "It's now very likely that the inventory adjustment process is now complete, and manufacturers will resume activity towards more normal levels," commented Amit Kara, an economist at UBS (UBS).
Blaming Anglo-American Bankers
Of course, the prospect that improvement may be on the way hasn't eased the widespread anger over the chaos in the financial system. On Apr. 1, as world leaders arrived in London, the financial center, known as the City, was eerily empty except for a couple of thousand protesters who engaged in an uneasy standoff with ranks of yellow-uniformed police in the warren of streets around the granite façade of the Bank of England, Britain's central bank. Most of the crowds were peaceful, but bands of troublemakers roamed about. In one instance they broke windows in a building of the Royal Bank of Scotland (RBS), a now notorious institution that has been taken over by the government. "I am sick of the rich getting more powerful and the poor getting poorer," said Lee Slanon, a 34-year-old unemployed painter from Nottingham who was carrying a sign reading "Bankers are wankers."
To avoid unsettling friction emerging from the summit, Obama and Brown will have to manage key Western European partners Germany and France, which rebuffed the original U.S. desire to pile on more stimulus spending and are instead demanding tough measures to curb the reckless bankers—seen as mostly based in New York and London—whom they blame for creating the financial crisis in the first place.
There have even been mutterings from Paris that French President Nicolas Sarkozy might boycott the summit or walk out if the language in the final communiqué doesn't meet his specifications. But snubbing the popular American President at an early meeting seems too bizarre a move even for the strong-willed Sarko. Indeed, he seemed to pour cold water on that prospect before coming to London on Apr. 1.
IMF to Eastern Europe's Rescue
Yet both France and Germany appear to be offering Obama and Brown very little—not a very good start in their respective bilateral relationships with the new U.S. President. At the same time, the Germans are likely to be substantial, if indirect, beneficiaries of the summit if the IMF does get a big capital increase, as has been foreshadowed. Much of that money might be deployed in Eastern Europe, which has been hit hard by the downturn. So IMF programs will, in effect, bail out banks and exporters in Germany, Austria, Switzerland, and Sweden, among others.
Many analysts think Eastern Europe is a relatively small problem that could be easily handled by a beefed up IMF. "The IMF is the No. 1 concrete issue for the meeting and it is especially important for Europe, because in the near term, IMF action will be largely in Europe," says Nicolas Véron, research fellow at Bruegel, a Brussels-based economic think tank.
German Chancellor Angela Merkel has especially dug in against increasing domestic fiscal stimulus, contending that Germany is an exporting nation and should stay that way. Merkel's stance probably owes a lot to the fact that she faces a tough general election on Sept. 27. She counts deficit reduction as one of the few concrete achievements of her otherwise ineffective coalition government. And she is loath to rebuild the deficit, which might require higher taxes later to pay it down and would place what she deems an unacceptable burden on the country's shrinking working-age population. Germans also fear that too much spending could send the wrong signal to European Union members such as Italy or Greece that have a history of reckless fiscal management.
Some of Merkel's outspokenness can be chalked up to posturing in an attempt to look more powerful than Frank-Walter Steinmeier, the Social Democratic foreign minister who is likely to be her opponent in the general election. Merkel also wants closer regulation of financial markets and a crackdown on tax havens—but so does Obama, even if they differ on some details.
The Economy: Has Anything Changed?
Merkel's resistance highlights the possibility that over the next few years, the world economy might well return to a state similar to that which led to the recent problems. It is widely agreed that so-called imbalances are fundamental to the current mess: High-consumption countries, particularly the U.S., built up big trade deficits with exporters such as China and Japan, who in turn poured the money back into those countries' financial markets, setting the stage for expensive financial excesses.
Germany also is a major exporter, but it doesn't have the huge financial reserves of China, Japan, and some oil-exporting countries. Thanks to the financial shock that followed the collapse of Lehman Brothers and other financial institutions, the U.S. and other consuming nations now have tightened their belts. But that contraction has been a disaster for the world economy.
Governments are now desperately pumping in money to rebuild demand. But much of the action is in the usual consuming countries, such as the U.S. and Britain, which are now being lectured by producers China and Germany for recklessly running up deficits. One wonders how China and other trade-surplus countries think their products will otherwise sell. There likely needs to be more even distribution of production and consumption in the world, but such a shift is many summits away.