Comments on G20 Communique and Medium-Term Macroeconomic Expectations

March 19, 2017

The Group of Twenty finance ministers and central bank leaders met for two days in Baden-Baden, Germany and released a statement on Saturday that is notable for two omissions.

The first deletion concerns trade and exchange rate policy. The pledge regarding currency management wasn’t changed and still states,

We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will consult closely on exchange markets. We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes.

Regarding trade policy, two significant modifications were made. Gone is an explicit sentence from previous such communiques that said, “we will resist all forms of protectionism.” Moreover, whereas previous statements of shared objectives endorsed the pursuit of mutual growth-supporting trade policies, Saturday’s release shifts the emphasis from expanding trade to shrinking external imbalances:

We will strive to reduce excessive global imbalances, promote greater inclusiveness and fairness and reduce inequality in our pursuit of economic growth.

The second broad omission from G20 principles that becomes apparent in Saturday’s statement concerns a concerted effort to cut back carbon emissions that contribute to world climate change. Previously, this had been an area of increasing cooperation. Preventing catastrophic climate change is a goal that benefits all the peoples of the world and one that cannot be properly tackled without every country doing its part. The new U.S. administration rejects the scientific findings that climate change is real and reflects preventable mankind activity. Washington’s position is that the whole thing is a hoax perpetrated to depress U.S. economic growth.

The modifications embedded in the G20 statement have potentially negative long-term implications for the dollar. Any doubt that changed language on climate change and trade were instigated by the U.S. delegation to the G20 talks in Baden-Baden has been removed by disgruntled comments from other attending delegations that have pinned the blame on the United States. America’s isolation creates an unusual relationship between the world’s preeminent superpower and the rest of the world. Since the start of the Second World War, the U.S. has played the part of leader of the free world, sharing its economic bounty with other democracies in exchange for maintaining a peace that avoided the horrors of the first half of the last century. Even while taking on this sacrifice, America still managed to out-grow other economies and to outspend everyone in maintaining the world’s most powerful armed forces.

It’s no accident that the dollar’s hegemonic position among all reserve currencies was never seriously challenged until now even through periods when its external value depreciated extensively over multiyear intervals. The consistency of U.S. foreign and international financial policy even as the political party in power changed several times, as well as good growth, broad, deep and resilient U.S. capital markets and price stability most of the time provided a great backdrop for the dollar to remain the dominant world reserve currency.

President Trump’s America First approach changes U.S. engagement in all matters with friend and foe from a cooperative enterprise to a competitive one. His rejection of U.S. as leader of the free world does not seem compatible with the U.S. currency remaining the world’s safest money to hold. The transformation probably will not happen right away, but no longer can one confidently imagine the dollar unchallenged for the next 10, 20 or even 30 years. The temptation will be huge for other nations to move forward in concert together but without the United States, just as Europe is making plans for a future without Great Britain.

By accelerating resources poured into military defense, America is unlikely to achieve the safety and command that its leaders anticipate. Time and again throughout history from Sparta to the Axis powers to the Soviet Union, strength built on brute force and military discipline alone has not sustained the respect of other countries or enduring safety.


For now medium-term expectations regarding the U.S., euro zone and Japanese economies have changed little. Every month, The Economist publishes a poll of forecasters, with projections of growth, CPI inflation and current accounts as a percent of GDP. The poll taken each March introduces forecasts for the following year. Hence, estimates for 2018 appeared this month for the first time. The forecasts from March for the outer year, in turn, provide a good sense of how analysts perceive long-run equilibrium.

  • United States: Projected growth in 2018 from the latest released survey is 2.4%, up marginally from 2.2% for 2017 from the March 2016 survey but still a half-percentage point less than 2.9% predicted for 2016 in the survey taken in March 2015. Until U.S. productivity bursts upward from its current deep malaise, the Trump administration’s goal of 4% will continue to lack credibility. The sequence of projected CPI inflation in the outer year from the March surveys of 2015, 2016, and this month trace a very steady line of 2.3%, 2.2% and 2.3%. Inflation expectations remained anchored. Interestingly, the current account deficit is believed likely to widen despite Trump’s hope to balance the trade account. Analysts project the current account gap at 2.8% of GDP next year. A year ago, the 2017 deficit-to-GDP ratio was projected to be 2.6%, and the expected ratio the year before that was 2.4%.
  • Euroland: In all three March surveys, growth in the outer year was projected to be 1.6%. Inflation in 2016 was put at 1.2% in March 2015, but inflation in the outer year in the two subsequent March surveys was projected at 1.4%. TJust as America’s current account deficit equilibrium is seen to be rising over time, the projected Euroland current account surplus-to-GDP ratio was bumped up from 2.4% to 2.6% and, for next year, to 2.8%. The imposition of bilateral trade barriers by the United States will not affect global imbalances without domestic policy changes that modify imbalances between investment and saving behaviors.
  • Japan: Analysts expect Japanese GDP to expand just 1.0% in 2018. A year ago, they envisaged growth of 0.6% in 2017, and the March 2015 survey produced a 2016 GDP projection of 1.7%. Growth in Japan remains weaker than in Euroland or the United States in part because its population is shrinking. This is the result of very strict barriers against immigration. Inflation next year in Japan is forecast at 1.0%. At least that’s above zero but still well below the central bank’s objective. A year ago, analysts were way too optimistic about how high inflation would rise this year with a forecast of 1.8%. Likewise, 1.4% inflation in 2016 was forecast in March 2015. Finally, as with the U.S. and Euroland, Japan’s current account imbalance, a surplus, is projected to keep widening. In March 2015, the surplus for 2016 was projected at 1.6% of GDP. A year later, the surplus for 2017 was put at 3.3% of GDP, and now analysts expect the 2018 surplus to widen to 3.6% of GDP.

2016 was a year of profound political upheaval not limited to the United States. More surprises may lie ahead, and political change tends to foreshadow policy change. The inertia exhibited in the surveyed forecasters’ notion of macroeconomic performance in the long term suggests either a belief that government policy doesn’t matter or that desired policy changes will not in fact happen. Or perhaps the progression from cause to effect in such matters is believed to consume a lot more time than a year or two.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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