Slow global growth sets challenge

Revitalizing world economy will be key task as leaders gather in Hangzhou, say experts

How to revitalize a slowing global economy when many policy tools have been exhausted will be a key challenge for leaders at the G20 Summit, according to experts.

The meeting in Hangzhou, Zhejiang province, on Sunday and Monday takes place against a difficult economic backdrop.

Eight years after the global financial crisis, growth has failed to return to anything that would have been considered normal before the crisis. The International Monetary Fund cut its forecast for global growth from 3.2 to 3.1 percent in July.

China — despite fears of a slowdown at the beginning of the year — is one of the few bright spots, recording higher-than-expected 6.7 percent growth in the second quarter.

Although momentum is building up around a concerted global move on fiscal policy, taking advantage of low interest rates to invest in infrastructure and other projects, a leading expert sees a fiscal spending spree as risky.

"My concern is, if there is a huge increase in fiscal deficits at this point, what will happen when interest rates eventually go up?" said Stephen Roach, senior fellow at the Jackson Institute for Global Affairs at Yale University and a top expert on the Chinese economy.

"I think there is a little bit of myopia involved with the fiscal policy advocates."

Although US Federal Reserve Board Chairwoman Janet Yellen indicated on Aug 26 that there could be a further hike in US interest rates this year, monetary policy almost everywhere else remains unprecedentedly loose.

The Bank of Japan imposed negative interest rates in January following the lead of the European Central Bank, which has held its deposit rate for bank holdings below zero since 2014.

The Bank of England slashed the UK base rate to 0.25 percent following the Brexit vote in August.

China, meanwhile, increased its infrastructure spending by 20 percent in the first half of this year. Much of the spending was directed to projects linked to the Belt and Road Initiative, which focuses on connectivity and cooperation among countries in Asia, Europe and Africa.

Louis Kuijs, the Hong Kong-based head of Asia economics for Oxford Economics, said he believes the Chinese and Asian economies are in better shape to pursue fiscal expansion than most European countries or the United States.

"We have seen a greater reliance on fiscal policy in China, and I think in Asia many governments, apart from that of Japan, have space to increase their fiscal deficits. It is a different picture in Europe."

However, Miranda Carr, the London-based head of Chinese thematic research at investment bank Haitong, believes that UK Prime Minister Theresa May, who will make her debut on the international stage at the Hangzhou summit, has indicated she is prepared to turn on the fiscal taps.

"It (the UK government) has abandoned the target to move its budget into surplus by 2020 and intends to invest in infrastructure projects and a new industrial policy," said Carr.

The summit, whose main aims include promoting free trade, comes against a backdrop of growing calls for protectionism.