When the leaders of the world’s seven most industrialized economies gather at the French resort town of Biarritz this weekend, the official focus will be on fighting economic inequality under the motto “working for a fairer capitalism”.
Yet with ongoing trade tensions and looming signs of a global slowdown, the minds of many of the leaders of the Group of Seven (G7) countries – the United States, Canada, Japan, the United Kingdom, Germany, France and Italy – may well be elsewhere.
The G7 Summit is likely to be dominated by ongoing trade tensions between the US and China and looming signs of a global slowdown, and like last year’s G7, it is likely to show how much the US and other countries are divided on how the global trading system should work. Last year, the US refused to sign on to the summit’s communique after it pledged to “fight protectionism”.
“In the G7 context, I think the Western Europeans do not view China in quite the same way, and that is a very important division between the US and the rest of the West,” says Richard Grieveson, deputy director of the Vienna Institute for International Economic Studies. “China is a world power, which is a challenger to the US,” he told Al Jazeera.
In May, US President Donald Trump kicked off the trade war by increasing tariffs on a number of Chinese exports. A truce at the end of June lasted barely a month before the US announced more tariffs for September, although some tariffs will now be delayed until December.
To add to the tensions, Washington has accused the Chinese of currency manipulation, a move that is very likely to be broached at the G7 Summit. Usually, such an accusation would be discussed beforehand with other G7 states, says Grieveson. “There appears to be no justification at all for designating China a currency manipulator, so it’s an entirely political thing.”
US economic uncertainty
Meanwhile, there are growing concerns about the US economy, which has been performing well but has started to show signs of cooling off. News last week that interest rates on 10-year bonds fell below those on two-year bonds – a so-called inverted yield curve – raised speculation about a coming recession.
According to Megan Greene, an economist and senior fellow at the Harvard Kennedy School, “the US is probably in a manufacturing recession, and so the question is, ‘Can that still move over into an economic recession?’ I don’t really see that happening unless it’s transmitted through the consumer.”
Currently, US consumer spending, which accounts for around two-thirds of the economy, is still strong, largely due to unemployment being at a historic low. At the same time, the University of Michigan’s survey of consumer sentiment showed a drop in confidence in August.
Although the US economy is relatively self-contained, it won’t be completely immune to economic doldrums in other parts of the world. “A slowdown globally will certainly impinge on the US,” Greene told Al Jazeera.
Meanwhile, the trade war between Washington and Beijing is starting to affect the global economy as a whole. The International Monetary Fund, which cut the forecast for global growth in 2019 to 3.2 percent in July, has warned that its current forecast for 2020 of 3.5 percent would be slashed by half a percentage point if the dispute escalates further.
The US is probably in a manufacturing recession, and so the question is 'Can that still move over into an economic recession?'
China, for its part, only grew by 6.2 percent in the second quarter, the lowest rate in 27 years. “The trade war has certainly bit in terms of the Chinese economy, but I do think the Chinese authorities have a lot of tools to reflate growth,” said Greene, pointing to the fact that Beijing this weekend brought in stimulus measures in the form of a key interest rate reform, aimed at lowering borrowing costs for companies.
In fact, it is Europe that seems to be suffering the most from the global trade tensions.
Europe’s largest economy, Germany, last week announced that it had contracted in the second quarter by 0.1 percent.
Then on Tuesday, Germany’s central bank, the Deutsche Bundesbank, said the slump appeared to be continuing during the third quarter due to falling industrial production and orders.
While the contraction is partly a normal cyclical development, “manufacturing faces a pronounced downturn”, says Stefan Kooths, an economist at the Kiel Institute for the World Economy. “This is reinforced by the fact that we have a lot of unrest in the world economy because it is the export-oriented sectors that feel the headwind most clearly.”
The threat of a recession is upping pressure on Germany to spend more on things like infrastructure and digitalization, particularly when it has zero borrowing costs. And there are already indications that Berlin may be budging. This week, Finance Minister Olaf Scholz said Germany has the fiscal strength to counter any future economic crisis “with full force,” including $55bn in extra spending.
What is clear is that Germany is no longer a growth engine for the eurozone, with the currency bloc seeing growth halved in the second quarter to just 0.2 percent.
Another headache is the ongoing political crisis in Italy. On Tuesday, Prime Minister Giuseppe Conte resigned after Matteo Salvini, the leader of the far-right League Party, pulled the plug on the coalition with the populist Five Star movement, in what was seen as a move to force early elections.
However, there is speculation that Five Star might now form a government with the centre-left Democratic Party, to allow Italy to draft its 2020 budget.
The Italian economy has long been a worry in the eurozone. “If whatever government is in place can’t meet Europe’s budgetary requests in the next budget, you could get a standoff,” says Greene. “If the Italian government doesn’t back off, we could see Italian borrowing costs starting to rise again.”
However, this wouldn’t necessarily herald a return of the euro crisis, when there were fears that countries might end up having to leave the eurozone.
“I think we are very, very far from that sort of scenario, much further away than we were back then, and the ECB [European Central Bank] has a great deal to do with that,” says Grieveson.
For Kooths, however, the euro crisis is not fully resolved, only postponed “because there is no agreement on the rules that should apply in a hard currency system like the euro”.
The other major European issue that is certain to be discussed at the summit is the prospect of an unruly Brexit. With UK Prime Minister Boris Johnson pledging to exit the EU by October 31, there are increasing gloomy predictions that the UK will crash out without a trade deal – something that is bound to affect the rest of the bloc.
“If it is this kind of no deal from one day to the next, then the whole trading regime in the rest of the EU changes,” says Grieveson. “It will be such a break in established ways of trading, that means the cost of trading and the procedures of trading.”
Furthermore, having to deal with the fallout will be a major distraction for the EU, warns Antonio Barroso of the risk-advisory group Teneo, who notes this is coming at a time “when the EU really needs to be thinking forward about how to deal with the potential economic slowdown and with the competition of world great powers”.
In this kind of new world order, Europe risks getting squeezed between the US and China.
Furthermore, says Barroso, the G7 divisions lay bare the fact that in the short term “the US has decided to use economic tools to achieve certain political aims or foreign policy aims, and that clearly has ruffled some feathers inside the group of developed economies, the G7”.
In the long term, he says, “we have passed from a world that was certainly much more multilateral than the one that we have now, which is one of rising great power competition between the US and China, with the EU somehow in the middle.”