The finance ministers and central bankers of the top 20 economies in the world met this weekend in Riyadh, Saudi Arabia. The G20 finance summit had a lot to ponder. First, there was the coronavirus epidemic. Would it turn into a pandemic? Would the impact of global growth, trade and investment be so severe as to tip the world economy into recession in 2020? Also, what is to be done about curbing and reducing greenhouse gas emissions with the world’s temperatures continuing to rise towards an increase above that set by the last international climate change agreement? Finally, is there nothing to be done about high and rising inequality of wealth and income and continued shift of profits by multi-nationals and rich oligarchs into ‘tax havens’?
The Saudi Arabia G20 communique provided no answers to any of these questions. At Riyadh, IMF managing director, Kristalina Georgieva, having previously announced a reduction in IMF forecasts for global growth to just 2.9%, now added a further reduction due to COVID-19. She reckoned that the epidemic will likely cut 0.1% from global economic growth to 2.8%, the lowest rate since the end of the Great Recession over ten years ago. And it would drag down growth for China’s economy to 5.6% this year from 6.0% previously forecast. “In our current baseline scenario, announced policies are implemented and China’s economy would return to normal in the second quarter. As a result, the impact on the world economy would be relatively minor and short-lived,” she said. But even that could be optimistic. “But we are also looking at more dire scenarios where the spread of the virus continues for longer and more globally, and the growth consequences are more protracted,”
French Finance Minister Bruno Le Maire said in Riyadh. “The question remains open whether it will be a V-shape with a quick recovery of the world economy, or whether it would lead to an L-shape with a persistent slowdown in world growth.” He said the V-shaped scenario was more likely.
As the ministers met, the latest data on COVID-19 suggested that China was getting the epidemic under control. It reported a sharp fall in new deaths and cases of the coronavirus, but world health officials warned it was too early to make predictions about the outbreak as new infections continued to rise in other countries. “Our biggest concern continues to be the potential for COVID-19 to spread in countries with weaker health systems,” WHO chief Tedros Adhanom Ghebreyesus said. The U.N. agency is calling for $675 million to support most vulnerable countries, he said, adding 13 countries in Africa are seen as a priority because of their links to China.
The Chinese authorities put on an optimistic air. Chen Yulu, a deputy governor of the People’s Bank of China, said policymakers had plenty of tools to support the economy, and were confident of winning the war against the epidemic. “We believe that after this epidemic is over, pent-up demand for consumption and investment will be fully released, and China’s economy will rebound swiftly,” Chen told state TV.
Other commentators are less convinced that China can recover quickly from shutting down industry, stopping tourism and keeping millions at home. Zhu Min, a former deputy managing director of the International Monetary Fund, reckoned that COVID-19 could slash US$185 billion off China’s economy in January and February. Dips in tourism and consumer spending could reduce first-quarter growth by three or four percentage points, according to Zhu Min, While online spending – particularly on education and entertainment services – would offset some of the losses, the total drain on the economy over the period could be as much as 1.38 trillion yuan, said Zhu. Based on figures from China’s National Bureau of Statistics, that would represent about 3.3 per cent of the country’s total retail sales in 2019.
Car sales, fell by 20.5 per cent year on year in January, their largest monthly dip in 15 years, according to figures from the China Passenger Car Association. And sales in the first two weeks of February fell 92 per cent from the same period of 2019, mainly due to showroom closures. Over the whole of 2020, the coronavirus epidemic could cost China 1 million car sales, or about 5 per cent of its annual total, the industry group said. “The falling consumption in the first quarter could knock down growth by three or four percentage points,” Zhu said. “We need a strong rebound, and that needs 10 times as much effort.”
Chen Wenling, chief economist at the China Centre for International Economic Exchanges, a Beijing-based think tank, said this week that even if national production returned to 80 per cent by the end of February, first-quarter growth would still be less than 4.5 per cent. By comparison, China’s economy grew by 6.4 per cent in the first three months of 2019.
What to do? At Riyadh, Japan’s answer was to call for increased government spending. Finance Minister Taro Aso called on G20 countries with ‘fiscal space’ (like Germany) to ramp up spending to help the global economy. “I told the G20 ministers that the spread of the coronavirus epidemic … could have a serious effect on the global economy,” Aso pointed out that Japan has deployed fiscal spending quite a bit, so wants other countries with fiscal room to do the same. This is ironic when it is realised that Japan’s permanent annual budget deficits do not appear to have saved the economy from dropping into recession, even before the effects of COVID-19 epidemic hit.
But don’t worry. Aso claimed that Japan continued to recovery moderately as a tight job market and rising household income offset some of the weaknesses in exports and output. “At this stage, I don’t think risks to Japan’s economy have suddenly heightened sharply.” That is wishful thinking.
As I have argued in many posts before, fiscal stimulus is likely to have a negligible effect on achieving economic recovery once a slump sets in and the capitalist sector stops investing and consumers stop spending (as much). That’s because government spending outside of welfare transfers is no more than 10% of most economies’ GDP and government investment (as opposed to spending on public services) is no more than 3% of GDP compared to 15-20% of GDP invested by the capitalist sector. It will take a huge increase in government investment to have an effect.
Moreover, the ability and willingness of governments to resort to such huge fiscal injections are limited. Gavyn Davies in the FT is sceptical: “the next global recession may result in a merging of what has traditionally been viewed as the two separate wings of macro policy, fiscal and monetary. It is a difficult question of political economy whether the central bank or the treasury is better placed to lead the design of an effective policy response in this environment. Japan has been in this position for several years and has so far failed to cut the Gordian knot. Policymakers in the US and Europe should be thinking well in advance about how they can co-operate both internationally and domestically to produce a better outcome. There is no sign of this happening yet.”
Perhaps only one country is capable to doing that. Given the size of the state sector and government control in China, a fiscal boost can have much more effect, as it did during the 2008-9 Great Recession, when China continued to grow while virtually every other economy went into a slump or slowed drastically. The Chinese government is ready to spend and invest big time to turn things round once the virus epidemic fades.
Even so, if China’s growth slows sharply for a couple of quarters, that will only add to the woes of the major economies. The latest economic activity indexes for the major advanced capitalist economies make sombre reading. Japan’s business activity indexes in February showed a significant fall below the stasis level of 50. Japan’s manufacturing PMI dropped to 47.6 in February 2020 from 48.8 in the previous month. The latest reading was the steepest pace of contraction in the manufacturing sector since December 2012. And the services PMI declined to 46.7 in February from 51.0 in the previous month. This was the steepest contraction in the service sector since April 2014, So the overall index fell to 47.0 from 50.1 in January. Again, this was the steepest contraction in private sector activity since April 2014. Japan is clearly in a slump.
Eurozone private sector activity showed a slight improvement in February. The overall ‘composite’ PMI in the Euro Area increased to 51.6 in February from 51.3 in January. This slight improvement was due mainly to German manufacturing, which is still contracting – but at a slower pace. The Eurozone is still growing, but at a snail’s pace.
The UK’s manufacturing activity in February jumped into mildly positive territory, up to 51.9 from 50.0 in January. This was a ten-month high, which is not saying much as the index was over 55 three years ago. The services sector index weakened a little in February but still showed modest growth at 53.3. So the overall ‘composite’ index was unchanged at 53.3. That means the UK economy is growing but very modestly in the first quarter of 2020.
But the big shocker was the US. The US economic activity indicator went below 50, signalling a contraction in the economy for the first time since the PMI survey began in 2014. The overall ‘composite’ indicator fell to 49.6 in February from 53.3 in January. The manufacturing index also fell to 50.8 from 51.5 in January. But the real bad news was the fall in the larger services sector, which dropped to 49.4 from 53.4. It seems that the US is joining Japan and the Eurozone in stagnating or even contracting in Q1 2020, and China has yet to report on the full economic impact of the coronavirus outbreak.
Other G20 economies are also on the cusp. Australia’s index was below 50 in February; South Africa too. We await data on the others.
In my last post on COVID-19, I commented: “it could be a trigger for a new economic slump because the world capitalist economy has slowed to near ‘stall speed’. The US is growing at just 2% a year, Europe and Japan at just 1%; and the major so-called emerging economies of Brazil, Mexico, Turkey, Argentina, South Africa, and Russia are basically static. The huge economies of India and China have also slowed significantly in the last year and if China takes an economic hit from the disruption caused by 2019-nCoV, that could be a tipping point.”
Up to now, the world’s stock markets have ignored this risk, convinced that zero or negative interest rates for borrowing and speculating would continue, thanks to the US Federal Reserve, and also in expecting the epidemic to dissipate by the end of this current quarter, so the ‘business as usual’ can be resumed. But with the outbreak picking up outside China and the likely slow economic recovery by China, the stock fantasists may be overoptimistic. And remember, global corporate profits are stagnant along with business investment, the main cause of the global slowdown.
As for the other issues discussed by the G20 ministers: climate change, inequality and tax havens, forget it. Nothing was agreed. For the first time, the final G20 communique included a reference to climate change “to examine the implications of climate change on financial stability”. It was ok to worry about the impact on financial assets and stock markets, but the US vetoed any mention of the impact on the world economy and people.
Nothing happened on inequality because the European countries could not agree on a common tax strategy on global tax avoidance.
7 thoughts on “G20 and COVID-19”
A correction. The mass of global profits is falling not stagnant. That means, significantly, a fall in the ABSOLUTE rate of profit, Marx’s precursor to recession. Latest Chinese data for December shows an absolute fall in the mass of profits for 2019. Likewise the USA. Latest FactSet data out this weekend shows an increase profit per share of 0.9% for the S&P 500 which means in reality a 5 – 8% fall in unadjusted non-corporate profits for 2019 when the BEA releases the data in May. If we are to defend the profit-investment hypothesis we need to be accurate over the respective movements in the relative and absolute rates of profit. Marx’s hypothesis holds. 2019 saw a fall, both in global investment and with it global production+trade as a result of falling profitability. The key to the corona virus is whether it spreads exponentially outside China. This virus outbreak could not have come at a more vulnerable time for the world economy. The lack of oomph coming out of the G20 shows they are in effect paralysed by the headlights of the oncoming train.
“Given the size of the state sector and government control in China, a fiscal boost can have much more effect, as it did during the 2008-9 Great Recession, when China continued to grow while virtually every other economy went into a slump or slowed drastically. The Chinese government is ready to spend and invest big time to turn things round once the virus epidemic fades.” Your optimism is unfounded. Debt matters even in China, even when “we owe it to ourselves” (that is, it is mostly domestic not foreign).
The Chinese economy is capitalist. Separate capitals exist — corporations, banks, and state enterprises at the provincial and city level. They are separate capitalist interests, and the tangle of debts among them can indeed trigger a financial crisis and then mass layoffs. No one can say by a date certain, but anyone who looks can see that even Chinese authoritarian capitalism obeys the law of value.
I do love the authority to which you simply assert your opinion as if it is anything more than a simplistic take.
e.g Separate capitals exist, but you give no regard to their relative sizes and hence who actually controls distinct sectors of the economy. In fact if you insert Michael’s quote AFTER your simplistic take it would serve exactly as a stronger counter point to your assertion.
I do love China as a topic, I think no other modern economic subject attracts so many “experts” ready to definitely teach us exactly what China is and what isn’t.
Nuttula, do you have a point to make about capitals of different size? More likely, you want to imply there is a large socialist sector. There is a large state sector — comprised of city, provincial, and national capitals that compete, form cartels, and other maneuvers typical of the capitalist drive for maximum accumulation. There is no overall planned allocation of investment. The plan disintegrated into “guidance” about fifteen years ago.
Given the size of the state sector and government control in China, a fiscal boost can have much more effect’ ’
‘Your optimism is unfounded’ ’’ ’The plan disintegrated into“ guidance ”about fifteen years ago’ ’
It’s not just M. R.’s optimism. It’s just that he doesn’t take into account, until now, the thesis of the class struggle or revolutionary cycle. Cycle that some Marxists call Kondratiev cycle. If MR took that thesis into account, he would know and predict that the Chinese socialist government, like what happened in the USSR and in OECD countries since the 1980s, will continue to dismantle (privatize) the State as the main economic agent, as already is doing. M.R. He knows and has given data on this privatization, but he has to cause it: the cycle. Therefore, there will be no relevant fiscal stimulus. Neither in China nor in the OECD, with minimal exceptions. It is a thorough restoration of Capitalism and China (and Cuba, North Korea) is not exempt from it. The modes of production move forward and backward for various reasons until complete implementation. Historically, this has always been the case (Walter Scheidel). It also happened to Capitalism. The current backward movement of socialism since the 1980s is an irreversible process because of the fact that capitalism is still the dominant force in the World-System. This period of restoration (with an extreme social collapse of the working classes: misery, pandemic, war.) Has only one possible end in the 2050s?, The 3rd impulse (3rd relevant revolution after 1.917-Urss and 1.949-China ) of the socialist mode of production.
Y is the USA.EU and UK not bothered,about the COVID deaths in their part of the world ?
Could it be that they want it ? Who are the dead ? The dead are the pensioners, and the persons,who are fatally sick.dindooohindoo
The gainer in every combo,is the West – which makes one wonder,how the COVID magically mutated in its new avatar.
Assuming that these dead persons in the West,had a residual life of 15 years, and we can assume that,by August,2020,there will be around 600000 dead in the West.
The pension to a pensioner,would not be less than 12,000 USD per annum, on an average,at the minimum.In addition, the medical and other social costs,on an aged pensioner,would be not less than another 8,000 USD per annum.
If they die,then on 6,00,000 people,if the West saves 20,000 USD per annum, you net USD 12 Billion,PER ANNUM – which will be around 200-300 billion for 15 years
One could argue that the US Fed just printed,the USD 12 Billion – but now it need not.The Youth in the west,had to work at high rates of tax and deductions – to finance the aged pension and health care benefits – which ultimately,led to outsourcing.
The scam would be shocking,if the dead,had no insurance ! That would be telling ! If 6,00,000 are dead,with insurance and an average insurance claim,of USD 1,00,000 – then you have a bomb – to wipe out the insurers.
If 10 million die – we are looking at net savings of USD 200 billion per annum and USD 3 Trillion over 15 years.This will also solve the health insurance problems in the US/EU,as the high claim insurers,will cease to exist – and thus lower the insurance costs,for the young,and the cost of labour in manufacturing.
if the aggregate savings on pensions and medical costs are USD 100,000 per annum,then on 10 million dead,we have a saving of ISD 1 trillion per annum,as a perpetual annuity (which is the minimum target – I suspect) – as the strategem ,is to kill people,with co-morbidities – and these are the people,who are a burden on the medical and pension infrastructure.
So the private LIFE insurers,take a 1 time HIT,in terms of claims paid out – and the state,gets a recurring benefit,in terms of pensions and health care costs – of which,some of the gains of the state,are passed back to the insurers,to offset the claim losses (and keep insurance rates low),and some of the gains to the state, are passed back to the residual young population,to reduce the rates of medical and life insurance.
Large number of services and industries,in the west,will die out.That will release labour and reprice resources and rents – to drastically lower costs – and that will make,”Make in USA”,viable
How will the state finance the loss of tax revenue and GDP.Ultimately,the state will have to demonetise the deposits, in banks, of the westerners.Simple ! The USA will not be able to demonetise the PRC holdings of US T-bills – not even if the PRC sinks a US aircraft carrier in the South China Sea.
All the nations who borrowed loans from PRC – will now force the PRC to do debt write offs.That will be a huge loss to the PRC,after the manufacturing shift from PRC to West.Post COVID,If 200 million people are unemployed in PRC – then you have Tiananmen – Part 2 – and then a PRC attack,on the Indian weasels, and US satellite states,like Taiwan.and new stooges like Vietnam.
Of Course,the PRC could also force the IMF,and the WB,to waive loans – but the harm to the PRC,will be done 1st.
Trump postpones the US Polls,as people cannot stand in queues,and no electioneering,is possible – and he has the cure – and by September,the pensioners are dead – death rate and infections rates drops ….. who is the gainer ? If Trump is winning – Putin will stay calm – else,he might attack Eastern EU.If Trump is winning – then it will be the last chance for PRC to annex Taiwan and Vietnam – and make Trump lose face. But the odds of PRC action is medium.
With massive unemployment in the West – the migrants will exit.Asians were made to clean toilets – that is their worth.They will exit.That will solve the migrants problem,rents and property rates will fall,labour will reprice,and the Westerners,will have to,start to work
The West has to take a BIG PICTURE view.South East Asia and Indian and Nepal ,are over populated,and there is no humanity there.There is no sentience,in the “so called humans”.They are robots – and 80% of them,have to die.Their time is over – they are obsolete, a dead weight,and a burden on earth.This will de-price the resources sector,lower demand,and solve the environment problem,forever.
Africans have been exploited,for at least ,2000 years – and they deserve,many more chances.
There are 3 simple steps
Are the “so-called humans” – having a “sentience” – to be assessed based on their “individual and collective actions”
If not,then they are “robots”
It is time to “terminate the robots”
It is the moral and ethical solution.They are redundant and obsol
As I said in Posit 4 of the post above
Trump WILL POSTPONE .It is 100%.dindooohindoo
I had stated in the 1st 3 lines of the posit
“Trump postpones the US Polls,as people cannot stand in queues,and no electioneering,is possible – and he has the cure – and by September,the pensioners are dead – death rate and infections rates drops ….. who is the gainer ?”
I expect sky rocketing death rates and daily cases !
I expect a Bio Terror hit on US Soil in the last 2 months of this calendar.Only Bio Terror – all else is obsolete
I expect a disaster in the South China Sea – INVOLVING the the PLN and the US Navy
And a disaster in West Asia – Saudia/Persia/Yenen/Syria and Israel
All these will hit US assets and all will be false flags.
It is as certain and inevitable , as the Sun Set. (not the Sun rise)