UBS: Stimulating conversation

Somewhat implausibly, Japanese Prime Minister Shinzo Abe used the platform of last week's G7 meeting to declare that the state of the global economy is as bad as it was in 2009, post-Lehman. None of the key economic indicators support that assertion, so why make such a claim?

01.06.2016 | 10:22 Uhr

For Prime Minister Abe,the answer to that question probably lies very close to home, but his preferred solution is unlikely to be met with a resounding chorus of approval further afield.

The G7 looks like a rather anachronistic grouping. Once upon a time it was the group of the seven largest economies. Only five of the seven are still ranked in the top seven. Huge economies like China and India are not members. But to concentrate on the size of the economy is to miss the whole point of the G7. The G7 is a club of like-minded, influential economies. Taken together, the voting power of the G7 in organisations like the IMF, the World Bank, the UN and the WTO is huge. Any deal that the G7 put together between themselves has a good chance of becoming the official policy of any of these organisations.

It was Japanese Prime Minister Shinzo Abe's turn to host the G7 meeting last week. He took the opportunity to argue that the current economic situation is as bad as the post-Lehman crisis. He noted that commodity prices had fallen by over 50% and that investment growth in EM is at its slowest pace since 2009 (chart 1a).

The scale of the commodity price movements may be similar, but that does not make them the same. There is a world of difference between a collapse in prices that comes from a negative demand shock (a recession) and one that comes from a positive supply shock (over-supply). Neither are great outcomes for commodity producers, but the positive supply shock is great news for consumers.

More interesting are not the similarities, but the differences. Emerging market growth is higher, export growth may be low but at least is positive, and the unemployment rate in the G7 has been dropping (chart 1b). And these are just a few of the comparisons. Equity markets, core inflation, confidence, you name it – all look markedly better now than they did in 2009.

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