The threat of recession looms over this G20 summit

At the G20 summit at the end of this week, the leaders of national and international organisations, their entourages, and the media will discuss important topics such as global development, innovation, climate change, women’s empowerment and global health. Yet the meetings on 28-29th June will be dominated by two other closely correlated issues: the prospects for a fragile world economy, and the outcome of the planned meeting between President Donald Trump and President Xi Jinping after the trade war truce collapsed last month.

The latest official prognosis about the state of the world economy, by the OECD last month, suggests global growth will slow to about 3 per cent this year—a level that is firmly in stagnation territory for most major economies. The OECD expects the tempo to rise slightly in 2020, but its economic gurus are not happy, and you can see why.

They say that the world economy depends too much on policy support. Cue comments from Mario Draghi, outgoing President of the ECB, who said recently that the central bank might have to persist with quantitative easing and cut interest rates to support the Euro Area economy, and the Federal Reserve, which said last week, in effect, it was likely to cut interest rates for the first time in a decade next month. The Bank of Japan is continuing with an aggressive QE programme, and the People’s Bank of China is providing significant liquidity to the Chinese banking system, which is creaking a bit because two small regional bank failures seem to have got the authorities worried about contagion risk.

Note that for most major central banks, monetary policy has still not normalised since radical measures began in 2008, and that’s with economic growth continuing. What they will do in the next downturn, no one yet knows. Nor, probably, do they.

Further, the OECD reminded us that although unemployment levels are the lowest in about 40 years in rich nations, real wages are only inching up by 1.5-2 per cent, not nearly enough to compensate for the past stagnation in living standards or close the income inequality gap.

Several further areas of vulnerability were emphasised. These included high levels of debt among US companies and in emerging markets, high valuations in property markets, anaemic European growth (compounded by the risk of confrontation between a populist Italian government and the Euro Area authorities), the threat of US-EU trade tensions, and a no-deal Brexit.

China’s year of the pig, associated with wealth, is defying its folklore. The economy is barely responding to recent stimulus, and shows no signs of pulling out of a record slump in automobile sales and weak investment.

But the biggest threat of all, perhaps, is the US-China trade war. The term belittles the nature of what the conflict is all about because while it certainly is about trade, commerce, and the struggle for technological dominance, it also has an important existential dimension which is about different, and sometimes irreconcilable, beliefs, values, and views about governance.

The economic consequences are already starting to pile up. Supply chains are being disrupted, and a significant proportion of foreign firms in China are relocating parts of their operations outside the country. Companies are being targeted and punished, while technology diffusion and foreign direct investment are also being scaled back.

While US companies in China still reluctantly support the US administration’s demands for fairer terms of business, hundreds of businesses at home have written to the White House to plead for a re-think, insisting that additional tariffs will simply raise prices, squeeze profits and harm US companies relative to foreign rivals not subject to Chinese counter-measures.

China’s already fragile-looking economy will undoubtedly deteriorate in the wake of the US decision to hike punitive tariffs to 25 per cent on $200bn of imports from the country. If it were to extend these to the half of Chinese imports not yet affected, as threatened, the cumulative effect might be to lower China’s GDP growth by 1-1.5 per cent.

It is no exaggeration to warn that a deterioration and extension of trade and commercial conflict could easily tip the US and world economy into a 2020 recession, and cause severe dislocation in China, whatever the formal GDP data says.

President Trump is now campaigning for re-election in 2020, while President Xi Jinping faces a weakening economy and embarrassment after his biggest political climbdown following the recent protests in Hong Kong. He is also running a big risk in taking a strongly nationalistic position versus the US, while China remains highly dependent on it for trade and technological know-how. You can see why both leaders might want this trade war to go away—at least for a while.

Amid the uncertain direction of the re-set in the US-China relationship, fractious politics are at work, with some on both sides eager to champion further “decoupling” and greater “self-reliance.” For these siren voices, the central issues are more existential than goods trade, intellectual property and access to markets.

The most we might hope for at the G20 is a presidential handshake photo opportunity, and an agreement to keep talking. That might at least maintain the status quo, and buy time, perhaps for some common ground to emerge on some things. No one should be fooled though. This conflict has planted deep roots very quickly and will cast long shadows over the world economy and the prospects for global co-operation.