The Great Reckoning for policymakers’ failures has begun

Next week, I will publish my annual Budget Outlook, covering the 2018-2020 period. The aim, as always, will be to challenge conventional wisdom when this seems to be heading in the wrong direction.  Before publishing the new Outlook each year, I always like to review my previous forecast. Past performance may not be a perfect guide to the future, but it is the best we have:

The 2007 Outlook ‘Budgeting for a Downturn‘, and 2008′s ‘Budgeting for Survival’ meant I was one of the few to forecast the 2008 Crisis
2009′s ‘Budgeting for a New Normal’ was then more positive than the consensus, suggesting “2010 should be a better year, as demand grows in line with a recovery in global GDP
The 2010 Outlook was ‘Budgeting for Uncertainty’. This introduced the concept of Scenario planning, to help deal with “today’s increasingly uncertain New Normal environment.”
2011 was ‘Budgeting for Austerity’. It anticipated weak growth across Europe as a result of the austerity measures being introduced, and disappointing global growth, whilst arguing that major new opportunities were opening up as a result of changing demographic trends
2012 was ‘Budgeting for an L-shaped recovery’, arguing that recovery was unlikely to meet expectations
2013 was ‘Budgeting for a VUCA world‘ where Volatility, Uncertainty, Complexity and Ambiguity would dominate
2014 was ‘Budgeting for the Cycle of Deflation‘, 2015 was ’Budgeting for the Great Unwinding of policymaker stimulus’, 2016 was ‘Budgeting for the Great Reckoning’

Please click here if you would like to download a free copy of all the Budget Outlooks.

My argument last year was that companies and investors would begin to run up against the reality of the impact of today’s “demographic deficit”.  They would find demand had fallen far short of policymakers’ promises.  As the chart shows, the IMF had forecast in 2011 that 2016 growth would be 4.7%, but in reality it was a third lower at just 3.2%.   I therefore argued:

“This false optimism has now created some very negative consequences:

 Companies committed to major capacity expansions during the 2011 – 2013 period, assuming demand growth would return to “normal” levels
 Policymakers committed to vast stimulus programmes, assuming that the debt would be paid off by a mixture of “normal” growth and rising inflation
 Today, this means that companies are losing pricing power as this new capacity comes online, whilst governments have found their debt is still rising in real terms

“This is the Great Reckoning that now faces investors and companies as they plan their Budgets for 2017 – 2019.”

Oil markets are just one example of what has happened.  A year ago, OPEC had forecast its new quotas would “rebalance the oil market” in H1 this year. When this proved over-optimistic, they had to be extended for a further 9 months into March 2018. Now, it expects to have to extend them through the whole of 2018.  And even today’s fragile supply/demand balance is only due to China’s massive purchases to fill its Strategic Reserve.

Policymakers’ unrealistic view of the world has also had political and social consequences, as I noted in the Outlook:

“The problem, of course, is that it will take years to undo the damage that has been done. Stimulus policies have created highly dangerous bubbles in many financial markets, which may well burst before too long. They have also meant it is most unlikely that governments will be able to keep their pension promises, as I warned a year ago.

Of course, it is still possible to hope that “something may turn up” to support “business as usual” Budgets. But hope is not a strategy. Today’s economic problems are already creating political and social unrest. And unfortunately, the outlook for 2017 – 2019 is that the economic, political and social landscape will become ever more uncertain.”

As the second chart confirms from Ipsos MORI, most people in the world’s major countries feel things are going in the wrong direction.  Voters have lost confidence in the political elite’s ability to deliver on its promises.  Almost everywhere one looks today, one now sees potential “accidents waiting to happen”.

Understandably, Populism gains support in such circumstances as people feel they and their children are losing out.

The last 10 years have proved that stimulus programmes cannot substitute for a lack of babies.  They generate debt mountains instead of sustainable demand, and so make the problems worse, not better.

Next week, I will look at what may happen in the 2018 – 2020 period, and the key risks that have developed as a result of the policy failures of the past decade.

 

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Brexit disaster looms as UK government power struggle erupts

UK voters were never very bothered about membership of the European Union (EU) before the Brexit vote last year.  Opinion polls instead showed they shared the general feeling of voters everywhere – that their country was heading in the wrong direction, and it was time for a change.  Now, last week’s Conservative Party conference showed that the government itself, and the prime minister, have also lost all sense of direction.

The problem is that nobody has any idea of a what a post-Brexit world would look like for the UK.  The Leave campaigners famously told the voters it would be a land where the UK would no longer “give” £350m/week ($455m) to Brussels, and could instead spend this money on improving health care and other worthy objectives.  This, of course, was a lie, as the head of the National Statistics Agency has since confirmed.  But then-premier Cameron failed to call out the lie at the time – fearing it would split his Conservative Party if he did.

15 months later, this lie has again come centre stage as the Foreign Secretary, Boris Johnson, revived it before the Conference as part of his bid to replace premier May:

“Once we have settled our accounts, we will take back control of roughly £350 million per week.  It would be a fine thing, as many of us have pointed out, if a lot of that money went on the NHS.”

As a result, the splits in the Conservative Party are out in the open, with its former chairman now calling for a leadership election and claiming at least 30 law-makers already support the move.  Bookmakers now expect May to leave office this year (offering odds of just evens), and suggest the UK will have a new election next year (odds of 2/1), despite the fact that Parliament has nearly 5 years to run.

May’s problem is two-fold:

 As the photo shows, she was humiliated in her main speech to the Conference by a prankster handing her a P45 form (the UK’s legal dismissal notice), and claiming Johnson had asked him to do it
 Her previous set-piece speech in Florence on negotiations with Brussels over the UK’s exit arrangements had also rebounded, as it made clear the Cabinet was divided on the terms that should be negotiated

Voters don’t like being lied to, and they don’t like governments that are unable to govern because of internal splits – particularly when the splits are over such a critical issue as the UK’s economic future.  Unsurprisingly, therefore, the opposition Labour party are now favorites to win the next election, and their leader, Jeremy Corbyn, is favourite to become the next prime minister.  This, of course, would confirm my suggestion 2 years ago:

“My local MP, Jeremy Corbyn, won the UK Labour Party leadership election on Saturday with a 60% majority. An anti-NATO socialist, he has represented the constituency for 32 years, and has never held even a junior ministerial post. Now, he could possibly become the UK’s next Prime Minister.

“His path to power depends on two developments taking place, neither of which are impossible to imagine. First, he needs to win back the 40 seats that Labour lost to the Scottish Nationalists in May. And then he has to hope the ruling Conservative Party tears itself apart during the up-coming Europe Referendum.”

Unfortunately, Corbyn would be unlikely to resolve the mess over Brexit.  In the past, before becoming leader, he took the Trotskyist view that the EU is a capitalist club, set up to defraud the workers.  He has since refused to confirm or deny his views on the subject, but he did take very little part in the Referendum campaign last year.  Had he been more active in arguing the official Labour Party position of Remain, it is unlikely that Leave would have won.

Today, he is far more concerned over the likely result of a Labour Party win on financial markets, with his shadow Finance Minister admitting recently they were “war-gaming” in advance of an expected currency crisis.  UK interest rates are already rising, as foreign buyers wonder whether they should continue to hold their current 28% share of the UK government bond market.  Clearly, it is highly likely that a Labour government would need to return to capital controls after a 40-year break, to protect their finances.

A VERY HARD BREXIT IS BECOMING ALMOST CERTAIN
The confusion and growing chaos in the political world means that the detail of Brexit negotiations has taken a back seat.  The UK has still to make detailed proposals on the 3 critical issues that need to be settled before any trade talks can begin – rights of EU/UK citizens post-Brexit; status of the N Ireland/Ireland border; UK debts to Brussels for previously agreed spending.  And most European governments are now far more focused on domestic concerns:

  As I warned a year ago, the Populist Alternative für Deutschland did indeed “gain enough seats to make a continuation of the current “Grand Coalition” between the CDU/CSU/SDP impossible” in Germany
  Spain has to somehow resolve the Catalan crisis, following last week’s violence over the independence referendum
  Italy has autonomy referenda taking place in the wealthy Lombardy and Venice regions in 2 weeks, and then faces a difficult national election where the populist 5 Star movement leads most opinion polls. The scope for political chaos is clear, as the wealthy Northern regions want to reduce their tax payments to the south – whilst southern-based 5 Star want more money to go in their direction

President Trump has also undermined the Brexit position.  He initially promised a “very big and exciting” US-UK trade deal post Brexit.  But since then the US has supported a protectionist move by Boeing to effectively shut-down the vital Bombardier aircraft factory in Belfast, N Ireland, despite May’s personal appeals to him. And last week, it joined Australia, New Zealand, Argentina and Brazil in objecting to the EU-UK agreement on agricultural quotas post-Brexit.

I have taken part in trade talks and have also negotiated major contracts around the world.  So I know from experience the UK could never have achieved new deals within the 2 years promised by leading Brexiteers.

Today, it is also increasingly clear that May’s government doesn’t have the votes in Parliament to agree any financial deal that would be acceptable in Brussels.  So whilst large parts of UK industry still assume Brexit will mean “business as usual”, European companies are being more realistic.    In a most unusual move, the head of the Federation of German Industries spelt out the likely end result last week:

“The British government is lacking a clear concept despite talking a lot. German companies with a presence in Britain and Northern Ireland must now make provisions for the serious case of a very hard exit. Anything else would be naive…The unbundling of one of Germany’s closest allies is unavoidably connected with high economic losses. A disorderly exit by the British from the EU without any follow up controls would bring with it considerable upheaval for all participants. (German companies feel) not only that the sword of Damocles of insecurity is hovering over them, but even more so that they are exposed to the danger of massive devaluation.”

UK, European and global companies are already drawing up their budgets for 2018 – 2020. They cannot wait until Brexit day on 29 March 2019 before making their plans. And so, as it becomes increasingly obvious that the UK-EU talks are headed for stalemate, and that ideas of a lengthy transition period are simply a dream, they will make their own plans on the assumption that the UK will head over the Brexit cliff in 18 months time.

Nobody knows what will happen next.  But prudent companies, investors and individuals have to face the fact that Brexit, as I warned after the vote, is likely to be “a disaster for the UK, Europe and the world“.

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Investors ponder further shocks after North Korea jolt

Interviewed for this Reuters articleI suggest today’s low levels of market volatility could be “the calm before the storm” 

Wall St Aug17Saikat Chatterjee and Vikram Subhedar, AUGUST 11, 2017 / 5:06 PM

LONDON (Reuters) – After this week’s war of words between the United States and North Korea triggered the biggest fall in global stocks since the U.S. presidential election, investors are wondering what other off-radar shocks may be waiting to rock world markets.

Although there is little sign so far that investors are protecting themselves against a major sell-off, some say the current environment masks latent risks.

“Every day, our risk models tell us to take more risk because of falling volatility but with markets being where they are, we have to be very careful in not following them blindly,” said James Kwok, head of currency management at Amundi in London.  ”So we try to project scenarios on what can go wrong and where are markets not looking.”

Such has been the extraordinary period of stability in financial markets in recent years that world stocks have hit a series of record highs while gauges of broad market volatility have plunged to record lows.  That benign investment environment has been fostered by central banks which have pumped vast sums of cash into economies since the global financial crisis that began a decade ago, lifting asset prices globally.

Flows into most asset classes have already overtaken peaks reached before the financial crisis.  For example, inflows into active and passive equity funds have nearly doubled to $10.9 trillion at the end of June 2017 from a September 2007 peak, according to Thomson Reuters Lipper data. Inflows into bonds have meanwhile increased nearly three-fold to $4.1 trillion in that period.

Broad market gauges of risk, such as the CBOE Volatility Index .VIX, better known as the VIX, and its bond market counterpart, the Merrill Lynch Option volatility index .VOL remain pinned near record lows despite a spike this week.  But analysts say low market volatility masks the heavy weight of options written on these gauges by investment banks betting that the calm conditions will persist for a long time.

That has been accompanied by the growing popularity of inverse-volatility ETF products, which have doubled in value this year as market volatility has cratered.  Morgan Stanley strategists say the volume of bets on volatility remaining low means even a small increase in price swings could force some of these leveraged bets to unwind, triggering shock waves in the financial system and sending stock markets tumbling.

Daily percentage changes are important in the volatility world because a lot of these exchange-listed products and notes are rebalanced daily based on these changes, so that any large change would automatically trigger selling pressure elsewhere.

“This is why lower volatility creates higher risk,” said Christopher Metli, a Morgan Stanley quantitative derivatives strategist in a recent note.  He estimates that a 12 point rise in the VIX could send the S&P 500 index down by 3.5 percent. A move of that magnitude was last seen after Britain’s shock Brexit vote in June 2016.

But a spike in volatility is not the only scenario worrying investors.

Other risks markets may be ignoring include the implications of a messy British exit from the European Union and the risks that the Qatar crisis could spiral out of control in the Middle East and hit oil prices. Even the prospect of a newcomer at top of the U.S. Federal Reserve when Janet Yellen steps down in 2018 could prove unnerving.

“Today’s low volatility is the calm before the storm and doesn’t reflect the real world in which companies are operating, or the major uncertainties that are developing,” said Paul Hodges, chairman at International eChem, a consultancy.

Another variable is the expectation that central banks will soon start unwinding their massive post-crisis stimulus measures, with unpredictable results.  One of the biggest risks seen lurking is the rise and growing influence on the world’s stock markets of passive funds, which aim to track rather than beat benchmarks and charge lower fees than their more actively-managed peers.

The proportion of stocks on the main U.S. benchmark equity index that are now owned by such passive investors has nearly doubled since the 2008 crisis to 37 percent.  But redemption pressures on large passive investors could exacerbate any market selloff.

Apple Inc (AAPL.O), a stock market darling, has a fifth of its outstanding stock held by index funds with Vanguard, BlackRock and State Street making up the top three holders, according to latest Thomson Reuters data.  The head of sales of a large British-based bond fund said some of its clients are trying to put together pools of money with which to snap up beaten-down stocks if a large emerging market-focused ETF is faced with sudden redemption pressures.

“We get a lot of queries on what are some of the risks that markets may be overlooking, and that is what keeps us up at night,” he said.

 

Reporting by Saikat Chatterjee and Vikram Subhedar, Graphic by Saikat Chatterjee and Ritvik Carvalho; Editing by Catherine Evans

Political risk and interest rates rise in US, UK and Japan, as debt and dysfunctionality grow

Debt Jul17

It was almost exactly 10 years ago that then Citibank boss, Chuck Prince, unintentionally highlighted the approach of the subprime crisis with his comment that:

We are not scared. We are not panicked. We are not rattled. Our team has been through this before.’ We are ’still dancing’.”

On Friday JP Morgan’s CEO, Jamie Dimon, provided a new and more considered warning:

“Since the Great Recession, which is now 8 years old, we’ve been growing at 1.5% – 2% in spite of stupidity and political gridlock….We have become one of the most bureaucratic, confusing, litigious societies on the planet.  It’s almost an embarrassment being an American citizen traveling around the world and listening to the stupid s— we have to deal with in this country. And at one point we all have to get our act together or we won’t do what we’re supposed to [do] for the average Americans.”

The chart above, from OECD data, highlights one key result of the dysfunctionality that Dimon describes:

  Central bank stimulus has proved to be a complete failure, as it cannot compensate for today’s “demographic deficit”
  UK debt as a percentage of GDP has more than doubled from 51% in 2007 to 123% last year
  US debt has risen from an already high 77% in 2007 to 128% last year
  Japanese debt has risen from an insane 175% in 2007 to an impossible-to-repay 240%

Debt is essentially just a way of bringing forward demand from the future.  If I can borrow money today, I don’t have to wait till tomorrow to buy what I need.  But, I do then have to pay back the debt – I can’t borrow forever.  So high levels of debt inevitably create major headwinds for future growth.

IMF growthUnfortunately, central banks and their admirers thought this simple rule didn’t apply to them.  They imagined they could print as much money as they liked – and then, magically, all the debt would disappear through a mix of economic growth and inflation.  But as the second chart shows, they were completely wrong:

  In April 2011, the IMF forecast global GDP in 2016 would be 4.7%
  In April 2013, they were still convinced it would be 4.5%
  Even in April 2015, they were confident it would be 3.8%
  But in reality, it was just 3.1%

And meanwhile inflation, which was supposed to help the debt to disappear in real terms, has also failed to take off. US inflation last month was just 1.6%, and is probably now heading lower as oil prices continue to decline.

May, Trump, AbeIn turn, this dysfunctionality in economic policy is creating political and social risk:

  The UK has a minority government, which now has to implement the Brexit decision.  This represents the biggest economic, social and political challenge that the UK has faced since World War 2.  But as the former head of the UK civil service warned yesterday:

“The EU has clear negotiating guidelines, while it appears that cabinet members haven’t yet finished negotiating with each other, never mind the EU”. He calls on ministers to “start being honest about the complexity of the challenge. There is no chance all the details will be hammered out in 20 months. We will need a long transition phase and the time needed does not diminish by pretending that this phase is just about ‘implementing’ agreed policies as they will not all be agreed.”

  The US faces similar challenges as President Trump aims to take the country in a completely new direction.  As of Friday, 6 months after the Inauguration, there are still no nominations for 370 of the 564 key Administration positions that require Senate confirmation. And last week, his Secretary of State, Rex Tillerson, highlighted some of the challenges he faces when contrasting his role as ExxonMobil CEO with his new position:

“You own it, you make the decision, and I had a very different organization around me… We had very long-standing, disciplined processes and decision-making — I mean, highly structured — that allows you to accomplish a lot, to accomplish a lot in a very efficient way.  [The US government is] not a highly disciplined organization. Decision-making is fragmented, and sometimes people don’t want to take decisions. Coordination is difficult through the interagency [process]…and in all honesty, we have a president that doesn’t come from the political world either.”

  Then there is Japan, where Premier Abe came to power claiming he would be able to counter the demographic challenges by boosting growth and inflation.  Yet as I noted a year ago, his $1.8tn of stimulus has had no impact on household spending  – and consumer spending is 60% of Japanese GDP.  In fact, 2016 data shows spending down 2% at ¥2.9 million versus 2012, and GDP growth just 1%, whilst inflation at only 0.4% is far below the 2% target.

As in the UK and US, political risk is now rising.  Abe lost the key Tokyo election earlier this month after various scandals. Voter support is below 30%, and two-thirds of voters “now back no party at all” – confirming the growing dysfunctionality in Japanese politics.

WOULD YOU LEND TO A FRIEND WHO RUNS UP DEBT WITH NO CLEAR PLAN TO PAY IT BACK?
So what is going to happen to all the debt built up in these 3 major countries?  There are already worrying signs that some investors are starting to pull back from UK, US and Japanese government bond markets.  Over the past year, almost unnoticed, major moves have taken place in benchmark 10-year rates:

  UK rates have nearly trebled from 0.5% to 1.3% today
  US rates have risen from 1.4% to 2.3% today;
  Japanese rates have risen from -0.3% to +0.1% today.

What would happen if these upward moves continue, and perhaps accelerate?  Will investors start to agree with William White, former chief economist of the central bankers’ bank (Bank for International Settlements), that:

“To put it in a nutshell, if it’s a debt problem we face and a problem of insolvency, it cannot be solved by central banks through simply printing the money. We can deal with illiquidity problems, but the central banks can’t deal with insolvency problems”.

White was one of the few to warn of the subprime crisis, and it seems highly likely he is right to warn again today.

 

Metastable markets at risk from impact of US, UK political stalemate

UK election Jun17We are living in very uncertain times, where the only certainty is that there is no “business as usual” option for the future.  One sign of this is that the extraordinary has become ordinary :

□   The FBI appear convinced Russia’s government targeted last year’s US elections: US President Trump and his former FBI head have since accused the other of lying about the issue
□   UK premier Theresa May has just lost an election she had expected to win by a landslide, and is now engaged in a probably futile attempt to remain in power

We have not seen political chaos on this scale since the 1970s.  Yet unlike the 1970s, markets continue to bury their heads in the sand, in the mistaken belief that the central banks will always be able to ensure that prices never fall.

The problem is two-fold:

□   Most investors and company executives grew up during the BabyBoomer-led economic SuperCycle. They have never known a world where growth disappointed, and where political stalemate led to major economic crises
□   Central bank policies have made the underlying situation worse, not better.  They have artificially boosted the value of financial assets (stocks, houses and commodities) whilst creating vast amounts of debt that can never be repaid

Even worse is that a generational divide has opened up in both the US and UK, as most assets are owned by older people.  Younger people instead find themselves burdened by high levels of student debt, and facing a future where weekly earnings are no longer rising in inflation-adjusted terms.

KEY AREAS OF TRUMP’S AGENDA HAVE FAILED TO MOVE FORWARD
It was clear when President Trump came to power that we had reached the end of “business as usual“. He immediately set about creating major disruption in global trade patterns:

□   He cancelled the TransPacific Partnership which would have linked 11 Pacific countries with the USA
□   He also notified Congress of his intention to renegotiate the North American Free Trade Agreement
□   More recently, he announced his intention to withdraw from the Paris Climate Change Agreement, COP-21

Unsurprisingly, push-back is now developing against these dramatic changes.  On COP-21, powerful opponents such as Michael Bloomberg have begun to co-ordinate moves by several key states, cities and companies to instead “do everything that America would have done if it stayed committed” to the Agreement.

Trump’s other major policy move – the lifting of restrictions on the development of fossil fuels – is also seeing push-back, this time from the markets.  Oil prices are already back to pre-election levels, and are likely to go much lower as new US production comes online. 

Trump’s position is also weakened by his failure to recruit a large team of highly skilled people, capable of promoting his agenda with all the relevant stakeholders.  So far, he has only nominated 83 people to fill the 558 key positions in his Administration that require Senate confirmation.  In the Dept of Commerce, only 7 of the 21 key positions have been nominated; in Energy, only 3 out of 22; in Treasury, only 10 out of 28.

As a result, the US now seems likely to face political stalemate.  Trump clearly has a mandate to push through his changes. But every day that passes makes it less likely that his key policy objectives – healthcare/tax reform and infrastructure spending – can be implemented.

The problem is simple – every new President has only a short “window of opportunity” to implement his policies, as their post-election momentum soon starts to disappear. By Labor Day (4 September), legislators are refocusing on next year’s mid-term elections. Their ability to make the compromises necessary for major legislation soon disappears, once the “losers” from any change make their voices heard.

MAY’S ELECTION FAILURE CREATES AN OPENING FOR CORBYN
Last Thursday’s election result confirmed my analysis back in October that:

In the UK, where most pundits regard the populist Labour Party leader, Jeremy Corbyn, as unelectable due to his radical socialist and pacifist  agenda, it would only take a breakdown in the Brexit negotiations for his chances of gaining power to rapidly improve.

The breakdown duly occurred with May’s decision to adopt a “hard Brexit”.  May, like Trump, relied on a small group of advisers and failed to recruit the team needed to push through her ambitious agenda of total EU withdrawal.  The result, as I noted last month, was that the “UK risked crashing out of EU after election without a trade deal“.

This stance created fertile ground for Corbyn as he mobilised large numbers of young people to vote for the first time. They quickly realised that their future was at stake, given that the Brexit negotiations are due to start on June 19.

May will clearly try to hang on – but she is unlikely to succeed for very long.  Corbyn’s move to propose giving EU citizens full rights after Brexit could easily be the straw that brings May down, as leading Tories such as Ken Clarke and others would no doubt vote with him.

As in the US, political stalemate is likely to develop.  Brexiteers no longer have a mandate for a “hard Brexit”, where the UK would leave the EU without access to the Single Market and Customs Union.  But neither can Remainers easily reverse the formal EU exit process, which will see the UK leave the EU by March 2019.

MARKETS ARE IN A METASTABLE STATE
Markets cannot continue to ignore these developments for much longer.  They are in what scientists would call a metastable state.  The detail of the next move is uncertain – and the only certainty is that the status quo is untenable:

□   There is no going back to the SuperCycle: the Western world faces a demand deficit due to its ageing population
□   Equally, there is no obvious and easy route forward, until policymakers focus on the “impact of the 100-year life

As a result, markets will soon be forced to rediscover the negative impact of political stalemate.  Probably Winston Churchill’s famous comment after the Allies’ victory at El Alamein in 1942 best describes the position:

“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

G7 Summit shows leaders are forgetting the lesson of the 1930s

G7 May17G7 Summits began in the crisis years of the mid-1970s, bringing Western leaders together to tackle the big issues of the day – oil price crises, the Cold War with the Soviet Union and many others.  Then, as stability returned in the 1980s with the BabyBoomer-led economic SuperCycle, they became forward-looking.  The agenda moved to boosting trade and globalisation, supporting the rise of China and India, and the IT revolution.

This weekend’s 43rd Summit in Italy suggested we may be going back to earlier days.  As the picture confirms, the leaders did all meet in the Italian city of Taormina in Sicily.  But they clearly found it difficult to meet the challenge set by their hosts of “Building the Foundations of Renewed Trust”.  One very worrying sign was that both the USA and the UK seem to have become semi-detached from the process. :

□  UK premier Theresa May left early, to “hold urgent talks with her election campaign chiefs” after new polls showed her lead dropping to single figure levels
□  President Trump refused to endorse the Paris Agreement, causing German Chancellor, Angela Merkel, to comment:
“The entire discussion about climate was very difficult, if not to say very dissatisfying. There are no indications whether the United States will stay in the Paris Agreement or not.”

There was some good news, with a compromise seemingly being agreed with US President Trump over his desire to dismantle the world’s open trading system, as the final statement noted:

“We reiterate our commitment to keep our markets open and to fight protectionism, while standing firm against all unfair trade practices. At the same time, we acknowledge trade has not always worked to the benefit of everyone.”

But it was a relatively weak statement, and nothing was said about the President’s withdrawal from the Trans-Pacific Partnership, or his decision to demand a formal review of the North American Free Trade Agreement. The change is even clearer by contrast with last year’s Summit in Japan, when the leaders committed:

To fight all forms of protectionism ….(and) encourage trade liberalization efforts through regional trade agreements including the Trans-Pacific Partnership, the Japan-EU Economic Partnership Agreement, the Transatlantic Trade and Investment Partnership and the Comprehensive Economic and Trade Agreement.”

Sadly, the same lack of unity had been seen just before the Summit, when President Trump failed to endorse Article 5 (the fundamental principle of the NATO Alliance), which declares that an attack on one member state is an attack on all, and requires a mutual response.  As the Financial Times noted:

This was particularly galling given that he was attending a memorial for the September 11 terror attacks — the only time Article 5 has been triggered. It remains unclear why he equivocated.”

Even the Summit dinner saw a lack of unity, with US National Economic Council director Gary Cohn suggesting:

There was a lot of what I would call pushing and prodding.”

This lack of a common purpose amongst Western leaders is deeply worrying.  Of course, they were able to agree on strong words about terrorism and the role of social media.  But their key role is to be pro-active, not reactive.

Collectively, their countries are responsible for nearly two-thirds of the global economy.  Individually, none of them – not even the USA – can hope to successfully tackle today’s challenges.  This was the rationale for the formation of the G7 in 1975, and it has since played a critical role in helping to spread peace and prosperity around the world.

Today’s G7 leaders seem to be in danger of forgetting their core purpose.  They need to re-open their history books and focus on the lesson of the 1930′s, when “beggar-my neighbour” trade policies led directly to World War II.