Thursday, April 2, 2009

G-20 Summit: Thorny Issues, a Soothing Outcome?

G-20 Summit: Thorny Issues, a Soothing Outcome?

Unless U.S. President Barack Obama and British Prime Minister Gordon Brown manage to pull off some last-minute lightning, the save-the-world Group of 20 summit in grimy East London at an exhibition hall ordinarily used for boat shows probably won't offer many big achievements. On the summit's eve, the best outcome looks likely to be a soothing pledge by world leaders to continue efforts to turn around the ailing world economy. The gathered politicians may offer more detailed agreement in some areas, including a big capital boost for the International Monetary Fund, the need to impose stricter global rules on banks and other financial actors, and further tightening of the screws on so-called tax havens.

A few weeks ago, with expectations running high and markets in meltdown, such a minimal outcome might have been a disaster. Now, following a sharp runup in equity markets and some signs that parts of the world economy are improving—or at least getting close to a bottom—it may be less urgent for the G-20's presidents and prime ministers to reach sweeping agreements that were probably unrealistic anyway. "I think there is a little less pressure on these leaders to solve the world's problems than three or four weeks ago because the markets have a better tone," says Larry Kantor, head of research at Barclays Capital (BCS), the investment banking arm of the big British bank.

Kantor, who is based in New York, was recently in London somewhat warily unveiling a new volume of analysis called "Green Shoots Have Arrived." He acknowledges that the title seems saucy in the British capital, where economic gloom is de rigeur. Prominent Britons who now make the mistake of uttering the "green shoots" phrase—including Gordon Brown's key economic advisor, Shriti Vadera, who recently became a British minister—have been pilloried in the resolutely pessimistic local press.

Forecasting Positive U.S. GDP

Still, Kantor says that he sees signs that "the bottoming-out process has begun" in parts of the world including China, which he thinks has "turned the corner," and the U.S., where he thinks "consumption has stabilized," though at a very low level. His argument has three basic points: First, expectations have been battered down so low that they are now easier to meet or beat; second, whatever the criticism of the details, policymakers have deployed a huge amount of stimulus in the form of spending plans and rate cuts; and third, manufacturers have cut back so sharply in reaction to falling demand that they may well need to increase output soon—unless consumption takes another sharp leg down.

Kantor notes, for instance, that U.S. auto sales have fallen recently to a dismal 9.4-million-vehicles annualized rate (the old norm was 16 to 17 million), but car manufacturing in the U.S. has declined even further, to an annualized rate of about 4.5 million. "You can't keep producing half of what you sell," he says. "At some point you run out of product," Kantor says. All told, Barclays forecasts that real gross domestic product in the U.S. will turn positive in the fourth quarter of this year.

Kantor isn't alone in being cautiously optimistic. Michael Heise, chief economist at German insurance giant Allianz (AZ), opined on Mar. 31 that the worst of the downturn is likely over. Heise, like Kantor, partly bases his argument on the thinking that companies and economies eventually run out of downside. "The U.S. has been in recession for two years," he says. "Recessions come to an end at some point, and this one will, too."

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