Economists’ message is to use upswing to find lasting solutions to global problems
Davos. — High in the Swiss mountains, there is a whiff of the pre-financial crisis optimism in the air, if not the swagger and opulence of the early 2000s. The world economy is stronger than at any time since the start of the decade. Business leaders have hailed the US administration’s tax cuts and the brighter economic outlook at a time of rapid technological progress.
Economic debate this week in Davos, however, is stuck in problem-solving mode.
Delegates to the World Economic Forum will not have been able to escape huge video screens beaming out images of destruction in Syria, desperate refugees, the burnt wreckage of London’s Grenfell tower, and time-lapse videos of environmental damage. Whether it is the dangers of protectionism, difficulty of structural reforms, social fissures, environmental degradation or unacceptable levels of inequality, fear has been more of a driver of discussion than greed.
No one doubts the economic upswing is real. The International Monetary Fund upgraded its forecasts for 2017, 2018 and 2019 as the WEF got under way on Monday, with Christine Lagarde, its managing director, noting that “all signs point to a further strengthening” in global economic performance.
Forecast global growth of 3.9 per cent this year and next would be the first sustained and broad-based expansion since before the start of the financial and economic crisis.
Many economists go further than the IMF. Kenneth Rogoff, professor of economics at Harvard University, said the underlying economic narrative was still too pessimistic now that forecasts were consistently being revised higher. He said “reflation” should displace “secular stagnation” as the summary phrase of the moment.
Professor Bob Shiller at Yale University said that while highly valued markets do not need a trigger to fall, financial valuations were not nearly as stretched as in the late 1990s before the dotcom bust. “In terms of price earnings ratios, we are not even close [to 2000 levels]. Valuations are still very high, but we can’t say we’re done” with the bull market.
The upswing has further to go, agreed Paul Sheard, chief economist of Standard & Poor’s, the rating agency. But he cautioned that “every major economy has its own structural issues which a cyclical expansion will not fix”, citing a lack of social cohesion in the US, the need for the eurozone to safeguard its future and China’s longer term debt problems.
On numerous panels around Davos, almost every economist or politician wanted to stress the problems which undermined the good news, apparently anxious not to repeat the pre-financial crisis complacency when only a few dissonant voices stood up to warn that the global economy might be heading for the rocks.
Raghuram Rajan, professor of finance at the University of Chicago and a former Indian central bank chief, said economists and technocrats had to accept that they were no longer in control of economic narratives, and that the post world war two narrative of international co-operation and prosperity was under threat. “[This idea] pushed growth for a long time but then frictions began,” he said. “The even harder task [now] is to convince people to ‘believe us’ and ‘we will set things right’.”
All the politicians wanted to stress the need to make capitalism work better so that the current upswing could be sustained. Paolo Gentiloni, prime minister of Italy — where a general election in March will test the strength of populism in Europe — warned that economic growth was not trickling down to the lower middle classes sufficiently.
Justin Trudeau, the Canadian prime minister, stressed the need for greater gender equality to maintain economic progress. German chancellor Angela Merkel called for a drive to complete an economic union in Europe while Emmanuel Macron, the French president, urged everyone to “push back” against protectionist and nationalist forces.
The target of many of these criticisms of the global world order was the US, although rarely did other leaders mention the US or President Donald Trump by name. Yet the concern was palpable at Davos that the US was about to rip up the international order in a way that would undermine global economic confidence and growth.
For their part, the largest US delegation ever at the WEF rejected the implicit criticism, saying the US was “open for business”, in favour of “fair and reciprocal trade” and never used the term “protectionism”. Mr Trump is set to deliver the most anticipated address of this year’s event .
Yet the US is also concerned that the global financial system does not work properly. Wilbur Ross, the commerce secretary, said: “Every single day there are various parties violating the rules and trying to take unfair advantage. So trade wars have been in place for quite a little while. The difference is the US troops are now coming to the ramparts.”
With so many concerns even as the economy is looking up, Ms Lagarde, as the guardian of global economic thinking in the IMF, has had no difficulty in achieving her mission at the start of the forum in persuading people not to sound complacent or satisfied. Appreciate the new “momentum”, but “use this time to find lasting solutions to the challenges facing the global economy”. — Financial Times.