Finance chiefs from the world’s largest economies are realizing the coronavirus isn’t just a short-term threat to global growth – it’s exposing the vulnerabilities of globalization itself.
As finance ministers and central bank governors kicked off their Group of 20 meeting in Riyadh, Saudi Arabia on Saturday, representatives from the world’s second-largest economy, China, were notably absent. Chinese authorities are instead focusing on containing an outbreak that’s so far killed more than 2,300 people, infected nearly 80,000, disrupted global supply chains and led to downgrades in global growth forecasts.
How far the virus will spread and how deep its economic impact will be remain unknown. But already in the Saudi capital, questions were being raised about the downsides to the dependencies that globalization brings.
“Do we want to still depend at the level of 90% or 95% on the supply chain of China for the automobile industry, for the drug industry, for the aeronautical industry, or do we draw the consequences of that situation to build new factories, new productions, and to be more independent and sovereign?” France’s Finance Minister Bruno Le Maire asked on Saturday. “That’s not protectionism, that’s just the necessity of being sovereign and independent from an industrial point of view.”
The disruption comes at a fraught time for economic policy makers, who are struggling to find new ways to boost growth when many of them are already operating with record-low interest rates, limiting their ability to provide stimulus through monetary policy. Attention is now is turning to fiscal policy, with more than half of the G-20 economies easing budgets to allow more spending.
The coronavirus outbreak “is a stress test for the world and China,” Douglas Flint, chairman of Standard Life Aberdeen, said in an interview with Bloomberg TV in Riyadh. “We are going to see more fiscal stimulus.”
Japanese Finance Minister Taro Aso said he’d be advocating for that to happen.
“To overcome downside risks we are facing together, I told the G-20 that I expect nations with big fiscal space will make a bold policy decision,” he said. “It’s becoming clear that the virus spread is a risk that could inflict a severe impact on the global economy.”
Addressing the assembled governors and finance ministers in the Saudi capital on Saturday, International Monetary Fund Managing Director Kristalina Georgieva said the outbreak had led the lender to cut its forecast for Chinese growth to 5.6% from 6% and to trim 0.1 percentage points from its global growth forecast, but that it’s also looking at more “dire” scenarios.
The coronavirus outbreak also makes it more likely the Organization of Economic Cooperation and Development will cut its economic forecasts next month, Jose Angel Gurria, the organization’s secretary-general, said in an interview in Riyadh.
“Look at what is going on: already we are in a slowdown, already we have the trade tensions, already investment was suffering, and now we have the coronavirus,” Gurria said.
Still, adding fiscal firepower may not be the solution to the supply difficulties that virus has created for the global economy. Even if governments fueled demand via spending, it wouldn’t address the issue of factory shutdowns in China.
“How do you substitute a global value chain?” Gurria asked. “If you have a supplier that is limited at this stage, that cannot export, how do you organize so the global balance sheet doesn’t stop? That is quite crucial.”
With the coronavirus inserting so much uncertainty into the economic outlook, and with top representatives from China, Russia and the U.K. absent, there was little sign as of Saturday evening that the Saudi meetings, which end with a joint communique on Sunday, would yield any dramatic policy prescriptions for the global economy.
The ministers also seemed to be far away from any agreement on another key agenda item that will be on the table on Sunday: taxing the profits of tech multinationals likeAlphabet Inc’s Google andFacebook Inc.
European countries have been demanding a global tax system be implemented by the end of the year, with four finance chiefs signing an opinion piece on Saturday that called the current system, in which some of the world’s most profitable companies shift profits from country to country to pay very little in taxes, “unacceptable, dysfunctional and – most important – unsustainable.”
But Treasury Secretary Steven Mnuchin seemed to throw a wrench into any plans to leave Saudi Arabia with a common plan of action in hand, as he warned his counterparts that solutions would requireapproval by the U.S. Congress.
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