Not too much was expected out of G20 ..... which was exactly what we got

Monday 29th February 2016

  

Not too much was expected out of G20 ..... which was exactly what we got

ref :- "G-20 Wants Governments Doing More, and Central Banks Less"  Bloomberg online

Equity markets are being marked a little lower this morning, which we suppose indicates a measure of disappointment that nothing very specific emerged from the G20's two-day get together in Shanghai. Frankly, it would have been more surprising if they had cobbled together anything of real substance on this occasion. We were talking last week of how some were hoping for some kind of currency deal akin to the Plaza Accord of 1985, and of how they were barking up the wrong tree. In the event, according to IMF Managing Director Christine Lagarde they were no discussions about anything like that.

There was however a statement in which members reaffirmed their commitment to refrain from competitive devaluations (predictable enough), and agreed to consult closely on currencies (less so). This is new language for the G20 and at this stage it's not entirely clear what it means, though it seems likely that suspicion that China is surreptitiously angling for a weaker Yuan and Japan's unexpected move to negative rates provided the impetus behind the agreement. Perhaps the intention is just to communicate better in order to avoid the kind of foreign exchange market turbulence that inevitably follows surprise moves. Officials did not comment on the irony of Japan's move actually presaging a 6% GAIN in the value of the Yen in February.

The main theme of the meeting was one we've been hearing a lot of: if more stimulus is needed, it should come from governments, not central banks. In other words, from fiscal spending and reform to boost growth rather than ever-easing monetary policy. If it sometimes seems as though some traders remain confused as to the precise purpose of any central bank's monetary policy (it's NOT to support asset-prices), the realisation that central banks can only do so much (and they're pretty close to having done it already) is not before time. Bank of England Governor Mark Carney even put on record his scepticism over negative rates and their ability to boost demand.

So lip-service was paid to the principle of fiscal stimulus but the language was nothing if not vague, which does not necessarily inspire confidence. Nor does the fact that some key players still seem more wedded to the austerity approach than one that would require splashing out on large infrastructure projects. U.K. Chancellor of the Exchequer George Osborne has just been warning us of further CUTS to public spending in his March budget. Germany's Finance Minister Schaeuble rejected the notion of fiscal stimulus only on Friday. And is it even plausible to expect U.S. Republicans to sign up to big increases in spending should they be required?

Easier said than done you might say, and concrete action on that front still seems some way off. And besides, just because monetary policies may be nearing their limits it doesn't mean that they're done entirely. China still has plenty of room to ease, and the European Central Bank is expected to lower its deposit rate (already minus 0.3%) and possibly boost its QE programme at its meeting on March 10. So more of the same after all, then? Well yes, but people need to get their head around the fact that this particular store of ammunition is close to being spent.