Still looking for a clear way forward
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Confusing signals from policy meetings last week of the Group of 20 (G-20) and the International Monetary Fund (IMF) reflect the global economy's unsettled state after the nominal end of the last recession. In giving Japan a conditional pass for its monet
Everybody has been talking about the need for structural adjustments in the way digital-age economies are organised, on top of occasional shock therapy like ramped-up liquidity and deep budget cuts. Old chestnuts such as labour and immigration, market opening, friendlier investment regulatory frameworks and a shrinking state sector to promote private initiative are also recurrent themes.
But reform has been hard for governments to bring off due to entrenched vested interests. Few have asked whether indefinite monetary easing and deleveraging in the opposing camps are ripe for review. Are both approaches dogmatic and too extreme in execution, as seen in the paucity of results?
In between the two extremes are orderly economies – China, South Korea, Australia, some of Latin America’s stars – which fret about asset bubbles and reduced export edge with cheap money sloshing around. South Korea’s delegate at the G-20 said his country regarded cascading currency devaluation for trade advantage as a worse security threat than North Korea. This was just one example of the irreconcilable gulf between a generalised munificence and a nation’s specific interests that hobbles the workings of the G-20 and IMF.
Policy-makers should be concerned about how the markets perceive the lack of movement. Commodities are trending down – oil, steel and copper besides gold, which tracks sentiment. It mirrors the falling shipping rates measured by the Baltic Dry Index, with more cargo ships idling.
Faltering commodity trade often presages a decline in the growth of infrastructure and consumables. Another negative indicator is the sharp rebound in stock markets of the past few months, paced to a big extent by hot money. Japan’s monetary easing will add to the frothiness. Precipitate stock gains give an impression of growth that does not exist. Even the IMF’s downgrade of its January gross domestic product forecasts for the world as a whole and in the principal economies, bar Japan, could look optimistic in these circumstances.
