Global financial crisis tops G20 agenda

At the top of their agenda is the global financial crisis. The November 15 summit was organised by outgoing US President George W Bush fol¬lowing a proposal from French President Nicolas Sarkozy.

While Bush might himself attend the summit, it is clear that his lameduck administra¬tion will not make any binding commitments involving the new administration of presi¬dentelect Barack Obama.

Other G20 countries are Argentina, Australia, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea and Turkey. The European Union is the 20th member.

According to Stephen Roach, chairman of Morgan Stanley Asia, the global crisis triggered by the US financial meltdown still has a long way to go.

At the first order of impact, the transmission mechanism has been crossproduct conta¬gion, involving derivatives and structured financial products.

At this stage, about 65 per cent of these firstorder impacts are behind us, Roach says.

At the second order, the transmission mechanism is the assetdependent real economies around the world, especially the US economy.

The outcomes are consoli¬dation of consumption and homebuilding, which account for as much as 70 per cent of US gross domestic product.

As of now, only 20 per cent of these secondorder impacts have been realised.

At the third order, the trans¬mission mechanism is crossborder linkages, especially trade and capital flows.

The outcomes are export and vendor financing risks. Unfortunately, only 10 per cent of these thirdorder impacts have materialised.

From 19752000, US con¬sumption averaged 67 per cent of GDP, while the most recent figures show it is 72 per cent of GDP.

The wealth effects in the US economy have also diminished sharply, with home prices and net equity extraction as a per¬centage of disposable income falling significantly over the past four years.

On a global scale, personal consumption in the US approached US$10 trillion (Bt350 trillion) in 2007, fol¬lowed by the 15country European Union (about $9 tril¬lion), Japan (over $2 trillion), China (about $1 trillion) and India (about $500 billion).

A big drop in US consump¬tion will wreck havoc on the exportled emerging economies of Asia, which would have no choice but to increase intraregional trade and investment.

As for China, the growth leaders are fixed investment and exports, both of which account¬ed for nearly 40 per cent of GDP in 2006.

In the cast of India, the macroeconomic picture is improving, with gross domestic savings rising to more than 33 per cent of GDP in 2007 from a low of 14 per cent in 1971.

Over the past decade, foreign direct investment and infra¬structure investment in India have also risen significantly.

After all, these major Asian economies, especially China, will have no choice but play a bigger role in driving the glob¬al economy via increased con¬sumption.