G20 Chengdu meeting: Falling from the 70th floor?

Another G20 meeting has come and gone. At the conclusion of their two-day gathering in Chengdu, finance ministers and central bank governors sent a signal that they remain firmly focused on monitoring emerging economic events. Once again, though, the G20 can be accused of kicking the can down the road and disappointing the many who have called for governments to be more active in addressing economic vulnerabilities and risks.

Ministers and governors talked about a range of emerging economic, political and financial risks. The Wall Street Journal's Mark Magnier and Ian Talley listed these as Brexit, Turkey's attempted coup, terror attacks, global growth downgrades, a potential Italian banking crisis, Chinese currency policy and commodity price uncertainty.

Notwithstanding these risks, headline G20 rhetoric on macroeconomic policy has hardly moved in the past six months, and was a reiteration of pledges to use all of fiscal, monetary and structural policy tools, and that monetary policy can't do the heavy lifting alone.

The signal we are meant to take away is that Brexit and other recent risks are not global problems the world needs to worry about, and that the global financial system has proven robust. Instead of knee-jerk policy responses, then, what is needed is a calm, steady, hand to finish the job on implementing agreed reforms. [fold]

As a result, the communique focused on the familiar mix of jargon and indicated some promising technical progress in areas such as tax, financial regulation, structural reform and capital flows.

In understanding the G20's stance, the advice provided by key international organisations is telling. In one corner, the IMF wants countries to embrace a comprehensive, positive, proactive agenda. Ahead of the meeting the IMF repeated its calls for more political leadership. IMF managing director Christine Lagarde called for broad-based policy efforts to lift global growth, reduce uncertainty around Brexit, implement effective macroeconomic support, address debt overhangs, lift growth and make that growth more inclusive, and strengthen multilateral action, including on trade.

At the same time, Financial Stability Board chair Mark Carney pointed out that the global economy and financial system has now weathered two spikes in uncertainty and risk aversion so far this year. In both cases, the global financial system continues to function and the financial system dampened, rather than amplified, the shock.

Moreover, the direct economic consequences appear largely confined to the UK and EU, and the FSB's assessment is backed up by both the Bank of England and the European Central Bank deciding not to adjust interest rates or amended their non-standard monetary policy settings in response to Brexit. Partly the decision has been based on more mild direct economic consequences than predicted.

The Chengdu communiqué leans closer to the FSB's confident handling of past events than the IMF's calls for more ambition and urgency against future ones. It seems that finance ministers and central bank governors are hoping for the 'muddle through' path and putting their faith in the financial and economic systems proving equally resilient to future shocks.

Time will tell how effectively the world can indeed muddle through. There is immense technical expertise available to inform the G20's decisions, and their read on the global economy and future risks may ultimately justify the lack of urgency expressed in Chengdu. As Martin Wolf noted at the start of the year, there remains lots of ruin in the economy; what matters is not whether the economy is well-managed but whether a calamity will be avoided.

But it is a dangerous game. As long as growth remains low, unemployment high, and there is a lack of sense that inequality is being addressed, risks will continue to mount and populations will remain dissatisfied.

And by the time the next crisis comes, the job of crisis responders may prove far harder than in 2009. Finance ministers and central bank governors are leaving the door wide open for anti-globalisation sentiment to keep proliferating. It adds to doubts over how constrained 'all the tools available' are in a world of disaffected voters, heightened sovereign debt levels and already-accommodative monetary policy settings.

In the words of Centre for International Governance Innovation distinguished fellow Tom Bernes, the idea that Brexit isn't such a bad gamble sounds very much like the sort of logic that you would expect to hear from a guy falling from a 70-story building as he passes the 50th floor, seemingly oblivious to his fate. As we learnt from the financial crisis, economists don't necessarily notice the breeze blowing around them.

Tristram Sainsbury