In a recent G-7 meeting, Japanese Prime Minister Shinzo Abe failed to convince leaders that the world is at risk of another global economic crisis, as stated in a communique as the summit draws to a close on Friday.
In the final statement issued by the G-7 countries, the group of countries said they “have strengthened the resilience of our economies in order to avoid falling into another crisis.”
The Japanese Prime Minister has been pushing the idea that there is a “risk of the global economy exceeding the normal economic cycle and falling into a crisis if we do not take appropriate policy responses in a timely manner.” To support his claim, Abe presented several documents that showed that the world economy could be heading into another crisis on the same scale as 2008’s Lehman fiasco.
Abe stood by his decision to increase sales taxes in Japan and would only be deterred by crises like the Lehman shock and a major earthquake. Without any such disruptions, he is expected to announce the tax increase in the coming week.
The Chinese economic slowdown was one of the main topics in the meeting, where the country in question is not included. That, along with a global steel surplus, concerned countries and at times caused disagreement among the members on how best to jumpstart growth. Abe pushed for greater spending on the government’s side to support monetary policies.
The communique revealed different responses to potential future problems in the world economy though their approaches are different, pledging a bag of tools depending on what the circumstances call for.
All members of the G-7 compromised between the austerity vs stimulus debate by leaving their options open and respond according to the needs of their countries moving to use “all policy tools – monetary, fiscal and structural – individually and collectively to strengthen global demand and address supply constraints while continuing our efforts to put debt on a sustainable path.”
The group agreed that monetary policy by itself will not help countries achieve sustainable and balanced growth.
The slowdown in China is primarily affecting Asia given its trade exposure with marginal impact in the U.S. and Europe, according to Singapore’s Australia & New Zealand Banking Group Ltd. Asia-Pacific chief economist Glenn Maguire.
Maguire claimed that “the G-7 is obviously aware of the ‘announcement effect’ the official communique has.” He added that “in such a situation, warning of negative risks and sentiment can become self-fulfilling.” It’s one of the reasons why the G-7 negotiating table could not reach a coordinated response with such an uneven dynamic.
The G-7 is also concerned about the Brexit referendum which could “reverse the trend toward greater global trade and investment and the jobs they create, and is a further serious risk to growth.”
On top of Brexit, other concerns include escalating geopolitical conflicts, terrorism and an influx of refugees, according to the communique.
The G-7 leaders recommitted to market-determined exchange rates and admitted that “weak demand and unaddressed structural problems are the key factors weighing on actual and potential growth.”
According to the communique, trade is still the key to drive growth and the Trans-Pacific Partnership trade pact by the 12 nations is an “important step forward” and is set to soon ratify the agreement. For the moment, the U.S. and Japan are delaying the ratification and Canada has yet to commit on the agreement.
The leaders will be working toward an agreement on the U.S.-EU Transatlantic Trade and Investment Partnership this year. As the EU-Canada pact is encouraged to enforce their agreement as quickly as possible.