WASHINGTON – Finance officials from the world’s largest economies are being urged to prevent the global economy from falling into a “new mediocre” in which growth remains stuck at subpar levels for years to come, trapping millions of people on unemployment rolls.
Finance ministers and central bank presidents of the Group of 20 nations, which include traditional economic powers such as the United States, Japan and Germany, and emerging economies such as Russia, China and India, were wrapping up two days of talks Friday with a joint statement of goals and a news conference expected in the early afternoon.
The meetings were coming at a time when the news from Europe has been gloomy, raising the prospect that the 18 nations that share the euro currency could be in danger of slipping into another recession.
Germany reported on Thursday that it had the biggest monthly plunge in exports in five years. That came after earlier news of sharp declines in industrial production, factory orders and business confidence in Europe’s biggest economy.
Australia, which chairs the G-20 this year, is pushing for adoption of an action plan that will establish a goal of boosting global growth by at least 2 per cent over what it would otherwise have been over the next five years. Such a target would mean an extra $2 trillion in output during that time period.
Australian Treasurer Joe Hockey told a conference in Washington on Wednesday that this goal was “ambitious but deliverable” and would mean millions of new jobs. The plan would rely in part on increased spending on infrastructure projects.
Treasury Secretary Jacob Lew and Federal Reserve Chairwoman Janet Yellen are representing the United States in the discussions. After getting an endorsement from the finance chiefs, the economic plan will be presented to President Barack Obama and other G-20 leaders for their sign-off at a summit meeting in mid-November in Brisbane, Australia.
Economic officials have said that just boosting spending on roads, airports and other infrastructure needs will not be enough to lift the global economy to sustained stronger growth, especially given the growing threats to growth in many regions of the world from Europe to Latin America to Japan.
The G-20 discussions were being held in advance of the annual meetings of the 188-nation International Monetary Fund and the World Bank.
In a global forecast prepared for the meetings, the IMF downgraded its outlook this year because Europe is at risk of slipping back into recession and persistent weakness is slowing Japan, China and Brazil. The IMF called the recovery uneven and said global growth this year would be 3.3 per cent, one-tenth of a percentage point below its forecast in July. And it lowered its outlook for 2015.
A report from the Brookings Institution also presented a downbeat assessment and called the United States “the sole major economy still showing signs of strength.”
“The world still seems to be counting on riding the coattails of the U.S. economy,” said Eswar Prasad, a Cornell University economist who was among the authors of the report.
IMF Managing Director Christine Lagarde, speaking to reporters Thursday, said bold action was urgently needed.
“In the face of what we have called the risk of a new mediocre, where growth is low and uneven, we certainly believe that there has to be a new momentum,” she said at an opening news conference.
Europe’s weakness has raised pressure on the European Central Bank, which sets interest rate policies for the 18 nations that use the euro currency, to do more to promote growth and fight low inflation.
Speaking at a Washington conference, Mario Draghi, head of the ECB, said, “We are accountable to the European people for delivering price stability, which means lifting inflation from its excessively low levels, and we will do exactly that.”
The global economy is facing other threats as well from heightened tensions over the conflict in Ukraine to the threat posed by Islamic militants in Syria and Iraq and a worsening Ebola outbreak in Africa.
The presidents of three West African nations made urgent pleas Thursday to the finance ministers for money, hospital beds and doctors. World Bank President Jim Kim said the epidemic could have a catastrophic impact on the region if it isn’t quickly contained and it spreads to other countries.
The lopsided shape of the global economy has begun to have consequences. The U.S. dollar has strengthened against major currencies, including the euro and the Japanese yen. That trend should help keep U.S. inflation low, but it could also dampen U.S. growth by depressing exports, which will be less competitive against countries whose currencies have weakened.
Minutes of the Federal Reserve’s September meeting showed that Fed officials discussed these developments, which investors took as a signal that the Fed will be in no hurry to raise interest rates with inflation lower and growth prospects reduced.
While the IMF and various G-20 officials said structural reforms such as changes in tax systems and labour markets will be needed, analysts warned that such changes will be hard to achieve. Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, said structural reforms represent “hard political choices that have to be made.”