Did Our World Leaders and Policymakers Come Together to Forge a Brighter Future?
While the leaders of the G7 countries (Canada, France, Germany, Italy, Japan, UK, and the US), as well as other leaders invited by the host country met this weekend in Biarritz, France, the annual Jackson Hole Symposium on the global economy was being attended by central bankers, policymakers, academics and economists from around the world to discuss the economic issues, implications and policy options. The markets were focused on any headlines coming from the two meetings which may give some certainty around contentious issues like trade and the direction of monetary policy. Unfortunately there seems to be no greater certainty this morning than there was at the close of business on Friday.
“Political shocks are turning into economic shocks” – RBA Governor Philip Lowe
This quote delivered by Lowe in his speech closing the symposium nicely sums up the feeling at this year’s meeting. The discussions about the challenges facing monetary policy are taking place against an increasingly tense global economic backdrop, with investors nervous about the risks of a recession stemming from President Trump’s escalating trade war with China.
Lowe’s comments focused on trade wars, Brexit, Hong Kong, and Italy, as well as other geopolitical issues. He went on to state that investment in infrastructure and structural reform in economies around the world would have a far greater impact on the global economy than rate cutting will be able to accomplish, but politicians are reluctant to take action. He also stated the obvious; that ‘ending political uncertainty would bring benefits’. He summed up by saying;
“With these three levers stuck (infrastructure investment, structural reform, and political stability), the challenge that [central bankers] face is that monetary policy is carrying too much of a burden.”
Uh-oh! If central bankers don’t believe that they will be able to stabilize their economies, who will? It would seem that this responsibility will fall onto political leaders. This could prove to be very problematic, as we continue to see political instability across the developed world (Italy scrambling to form a new government, US – China trade war continuing to escalate, newly minted UK PM Johnson threatening to leave the EU without a deal, uncertainty as to whether US democrats will ratify NAFTA 2.0).
Was there any progress towards political stability at the G7?
After Trump called China’s President Xi the ‘enemy’ last week as a reaction to China’s imposition of tariffs on $75 bio worth of US goods, he asserted that he has the authority to order American companies out of China, but then said he was having second thoughts about new tariffs on Chinese goods, only to have his aides clarify that what he actually meant was that he wished he’d raised tariffs faster. This morning he tweeted that President Xi is a ‘great leader’ of a ‘great country’. Additional political stability? I don’t think so!
However, according to reports, the summit served its purpose, namely “for leaders of some key countries to exchange views as a potential basis for cooperating better – or at least less badly – in the future” (Helger Schmiedling, Chief Economist at Berenberg Bank). Perhaps cooler heads will prevail and relationships between the world’s major political leaders will stabilize, but this weekend’s summit didn’t bring any additional certainty in this regard.
We are left with central bankers who feel that the policy tools at their disposal may not be effective paired with politicians more interested in sound bites than long-term political stability. Uncertainty will continue to be the key driver of markets for the foreseeable future.