G20 Conflict Averted

By Mark McFarland, global chief economist at Coutts. 

Heading into last weekend it looked like there would be warfare of the verbal variety in Sydney at the G20 gathering of policymakers, and potentially of the physical variety in Ukraine. The first didn’t happen, at least in public, and the second has been averted for now.

In Sydney, emerging-market governments were expected to demand that the Federal Reserve considers the wider impact of US monetary policy when removing the quantitative easing (bond purchases or QE) punch bowl. The G20′s communiqué, released Monday, dismisses the prospect of the US setting its domestic policy with regard to its impact on emerging markets. In fact, it emphasised fiscal policy in the fight against deflationary pressures. Gone is the language of austerity, replaced by a call to support global recovery and long-term fiscal sustainability.

The US will trim QE when it wants but the onus is now on the US Congress to play as a team and support growth. What this means for EU austerity programmes remains to be seen, so commentary from Brussels in the days ahead should be keenly watched.

One outcome with potential market impact was a pledge to speed up implementation of plans to impede multinationals from seeking tax shelters. The timetable set down in previous G20 meetings in September targets the next G20 meetings in Brisbane in November for full implementation – with information sharing between countries.

Politics and international co-operation will be important market drivers in the months ahead, with ongoing risk of contagion spreading from Ukraine to other parts of emerging Europe – Russia and Turkey in particular. Markets are in a positive mood after last weekend, but there is still plenty of room for error.

 

 

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