Global economy edging toward recession adds urgency to G-20

By Stella Dawson, Reuters

WASHINGTON–A global economy edging toward recession and confronting huge political challenges adds urgency to the G-20 summit in Mexico this week for strong world leadership of the kind last seen at the height of the 2007-09 financial crisis.

“The world is facing some very difficult times, economically and financially, socially and politically,” said Charles Dallara, managing director of the Institute of International Finance. “We need once again a global coordinated approach.” Leaders from the 20 industrialized and developing nations, representing more than 80 percent of world economic output, are expected to deliver pledges to stimulate growth while balancing those efforts against steps to rein in budget deficits at a meeting in Los Cabos, Mexico, on Monday and Tuesday. But there is a sense of pessimism that politicians, after spending more than US$1 trillion to stimulate growth — on top of US$6 trillion in central bank money printing the past four years — can offer policies sufficiently convincing to restore business and consumer confidence. Political differences over the future shape of Europe, a U.S. Congress bitterly divided over fiscal policy and a leadership change in China, not to mention political turmoil in Egypt and violence in Syria, will all cast a troubling shadow over the meeting.

“Significantly weaker fiscal positions and entrenched divergences both among governments and within countries mean that achieving even moderate cooperation, let alone any concrete results, at the Los Cabos summit will be a huge — probably insurmountable — task,” said Oxford Analytica in a client note. If politics disappoint and financial market turbulence escalates next week, it will rest on the shoulders of central bankers to restore some calm.

Emergency cash injections, which central bankers stand ready to deliver in case financial market stress becomes extreme after Sunday’s election in Greece, would be a stop-gap measure to steady markets and put a floor under confidence.

“If central bankers care about supporting riskier assets, below 1,250 on (the U.S. Standard and Poor’s 500 Index) could be considered their intervention zone,” said Dominic Konstams, economist at Deutsche Bank.

The benchmark S&P 500 index, which closed at 1,342.84, up 1 percent, on Friday, had flirted with that level earlier in June when Greece’s political stalemate heightened fears of a eurozone break-up.

More significant would be for central banks to deliver a round of rate cuts or other monetary stimulus to support growth, similar to those announced by the Bank of England last week.