G20 Growth Agenda
Sep. 2, 2016
Leaders of the G20 countries are preparing to meet in Hangzhou, China, where they will hold 2 days of talks on pressing global issues starting Sunday.
The summit is a talk shop for all the major players in the world economy. Here are the member countries and regions. They make up about 86 percent of global GDP, and their leaders began convening regular meetings in the wake of the financial crisis in 2008.
They managed to avoid a catastrophe -- the global economy gradually recovered. But now, the growth rate has practically stalled. The world economy has yet to recover to where it was before 2008.
And the IMF is warning of even slower growth ahead. The US is one of the few economies with some bright prospects but even here, confidence is shaky, and the US Federal Reserve is still waiting to raise rates.
There's a lot of uncertainty in Europe, too. Britain's decision to leave the EU has thrown up new challenges for the region.
Meanwhile, Japan is still looking for a way to shake off deflation. A big problem here is weak consumer spending, which makes up more than half of GDP.
What the world needs is a growth engine. China did that job after the financial crisis but the world's factory has lost momentum. Growth has fallen below 7 percent as the government tries to restructure the economy.
One of the major issues at the summit is likely to be structural reforms. After the financial crisis, governments around the world began stimulus measures to prop up their economies, helping to create jobs and revive growth somewhat.
But the massive easing project also flooded the world market with goods and money, and that's created a new problem: overcapacity. So the leaders want to restructure the global economy to balance supply and demand, and to lay the foundation for healthy economic growth. It's a massive job.
Minjie Xiao, a senior economist at SMBC Nikko Securities, says one industry in particular could be a focus for discussion.
"Structural reforms will be a big topic, especially excess production capacity," he said. "Europe and the United States are probably going to raise the steel problem with China. Although it’s rare to take up a specific topic at the G20 summit, I think there is a high probability steel will be on the agenda at this year’s summit."
Steel is a basic material for manufacturers and is very important for the world economy. The fall in demand after the financial crisis resulted in an oversupply of goods and that included steel. Prices have tumbled on world markets, and this is hitting the steel industry hard.
ArcelorMittal, the world’s largest steel producer, is based in Europe and its executives announced losses of almost 8 billion dollars at the end of last year. That’s the largest deficit since the company’s founding in 2006.
South Korea's Posco, one of the world’s top 5 steel-makers, posted its first-ever loss in the last business year. Executives blamed the glut of cheap steel coming from China.
Shareholders in Japan are hearing a similar story. Nippon Steel & Sumitomo Metal was one of 3 major Japanese steelmakers to report losses in the April to June quarter. It totaled 140 million dollars.
China is taking steps to deal with the criticism it has been facing over its steel production levels. China is the biggest player in steel production and the country accounts for 50 percent of the world’s output.
Even though demand has slumped, China has actually been making more steel since 2008. China's government is finally responding, setting a goal of reducing steel production.
The government aims to cut output by 45 million tons, or 5.6 percent. Just today, it announced plans to set up a special court to deal with industry bankruptcies. The restructuring will lead to lay-offs and decline in sales. Not surprisingly, the government is facing opposition from the industry.
According to Xiao, the Chinese government wants to use the G20 meeting as a lever to push its reform agenda.
"Of course, for local authorities in China, reducing steel production is a big headache because it means cutting jobs and increasing debt for companies in their jurisdiction. That's why restructuring has fallen behind schedule," Xiao says.
"Officials in the central government see this international meeting as a great opportunity to include the overcapacity problem in the joint statement. If it is included in the statement, the central government will be able to push forward with the reform on the grounds that it's an international commitment. In other words, the government can use external pressure to its advantage to accelerate structural reform in the country," he says.
Xiao says if the talks go favorably, the leaders could even commit to reduction targets. That would be a rare achievement for the G20, where leaders usually just agree on broad policy outlines.
Other subjects that are on the table at the summit include financial governance issues such as tax evasion and corruption. International trade will be another key talking point and leaders also want to make some progress on sustainable development.