G-20 takes first steps to change
— -- The G-20 summit in Pittsburgh took the first tiny steps toward an ambitious reordering of the global economy designed to prevent a repeat of the current financial crisis.
For the U.S., that means less credit-fueled shopping. Europe will need to invest more, while consumers in China and other fast-growing nations must open their wallets in ways they never have. The required changes across major economies are so profound that it likely will be years before the G-20's goal of "sustainable and balanced growth" can be reached.
"Rebalancing is not something that happens overnight," says economist Rachel Ziemba of Roubini Global Economics.
As economies shrank in the past year, the global imbalances associated with what the summit communiqué labeled "an era of irresponsibility" eased. The U.S. current account deficit — the broadest trade measure — hit a peak of 6.6% of gross domestic product in 2005. It's now fallen to 2.8%.
The mirror image of the U.S. deficit is China's massive current account surplus, which also has shrunk. But economists say there's a long way to go before that improvement becomes permanent and the world economy is placed on stable footing.
G-20 leaders agreed that the International Monetary Fund will periodically assess nations' economic policies and highlight potential problems before they mushroom. A country that strays faces diplomatic disapproval, but no real sanction.
Getting the Chinese to buy more and export less is a key part of the rebalancing. Chinese consumption this year is expected to reach $1.15 trillion, a $150 billion increase from 2008, Ziemba says.
That's a significant jump, but it pales alongside the spending hole likely to emerge as U.S. consumers retreat. If their spending returns to its long-run average share of the U.S. economy, up to $700 billion would vanish.
China could boost its domestic demand by making it easier for consumers to spend, either by increasing the value of the yuan or making credit more widely available. Since 2005, the yuan has risen more than 16% against the dollar, but remains significantly undervalued.
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