As global executives and policymakers arrived in Davos, Switzerland, for the annual meeting of the World Economic Forum, the portents seem to be good. The global economy continues to chug along, propelled by growth in emerging markets. The Europeans appear to have averted a break up of the euro and regained a measure of market confidence. There are even signs that sanity may be returning to the U.S. political system following this week’s decision by Republican leaders not to threaten a showdown over the debt ceiling.
If things are looking up, though, someone forgot to tell the Davos attendees. The global movers and shakers streamed into the Alpine resort in an uncertain and apprehensive mood. It was not quite like the dark days of 2009, when Davos played host as bankers and finance officials sought to stitch the global financial system back together, but it was no glad confident morning either.
A lack of global leadership lies at the heart of much of the nervousness. The Forum’s Global Agenda Council set the tone Tuesday by issuing a report warning of a growing list of threats, including worsening relations between China and Japan, the continued implosion of Syria and its destabilizing effect on the wider Middle East, and the risk of rising nationalism among Europeans weary of austerity. Council chairman Ian Bremmer, the president of the political consultancy Eurasia Group, who has coined the term G-0 to describe the apparent breakdown of global coordination, said an “eroding legitimacy of elites” is making the world a riskier place.
“Whether one looks at the dismal approval ratings of the U.S. Congress or the impact that more open flows of information is having on the Chinese ruling elite, it is clear that people are becoming more and more uninspired by their governments,” the Global Agenda Council said in its report. “When it comes to unemployment, the widening disparity of wealth or environmental degradation, highly complex or even intractable issues set politicians up for failure in the eyes of their constituents.”
A lack of coordination is especially evident in economic policy, said Charles Dallara, managing director of the Institute of International Finance (IIF), an industry lobby group. The Federal Reserve Board continues to pursue its quantitative easing policies in a bid to jump-start the U.S. economy, irrespective of complaints from emerging-markets countries about the destabilizing impact of a world awash in dollars. The Europeans and now the Japanese, after Tuesday’s new easing move, are similarly focused single-mindedly on their domestic difficulties.
The economic policy free-for-all “poses a serious risk to the global economy,” said Dallara, who noted that a German-U.S. clash over exchange rates helped precipitate the 1987 stock market crash. “The G-20 process seems increasingly impotent to deal with this problem,” he added.
On Tuesday the IIF released its latest forecast for global capital flows, predicting that flows to emerging-markets economies would increase modestly this year, to $1.12 trillion from $1.08 trillion last year, with private-sector equity investments accounting for the bulk of the increase. The institute also unveiled new modeling work claiming to show that so-called push factors — zero U.S. interest rates driving capital abroad in a search for yield — are roughly equivalent to the pull factor of strong emerging-markets growth in driving capital flows.
Institute executives warned that growing capital flows pose growing risks. Philip Suttle, the group’s chief economist, said there would be a risk of boom turning to bust if the Fed were to move earlier than expected to tighten policy. “Any financial system where you have zero interest rates around the world is not a safe system,” he said.
Corporate executives also appear wary about the outlook. A survey of more than 1,300 corporate CEOs, conducted by PricewaterhouseCoopers International, found that only 36 percent were confident of their companies’ growth prospects for the next 12 months, down from 40 percent a year earlier, and that 28 percent expect the global economy to decline this year, while only 18 percent expect an improvement.
Consider it battle weariness. “CEOS have learned that risks that were once seen as improbable are now probable,” explained Dennis Nally, the chairman of PwC. The survey found that CEOs are worried about a wider range of risks this year, topped by uncertainty about growth, deficits and excessive regulation, and that most are focusing on ways of cutting costs. “We’re in for yet another year when the global economy seems reluctant to get going,” he added.
In addition to macro concerns, the disruptive effects of technology are also keeping many companies on edge. C.P. Gurnani, CEO of Mahindra Satyam, the Indian information technology consultancy, said companies are increasingly looking to cut back on capital spending and devote resources to operational issues that might have a quick payback. “I find businesses very, very cautious, and I don’t find individuals that confident,” he said.
Big banks, which are traditionally among the key players behind the scenes at Davos, are unlikely to liven the mood as they continue to face pressure from new regulations and tougher market conditions. Many industry executives had hoped that the industry’s woes were cyclical, but “most have come to realize that the changes are, for the most part, permanent ones,” said Kevin Buehler, co-head of the global risk practice at McKinsey & Co. “Industry revenues as a whole are back to the levels, roughly, they had been in 2005, but there are much higher capital and liquidity requirements.”
The consultancy issued a new report this week predicting further consolidation that would leave the industry with only five or six truly global investment banks. Recent moves by Royal Bank of Scotland to drop its cash equities business and UBS to slash its fixed-income business are likely to be the first of many notable cutbacks. “Reduction in capacity is going to get the industry back toward equilibrium,” said Buehler.
Davos wouldn’t disagree. One of the annual meeting’s six co-chairs this year is none other than Axel Weber, the chairman of UBS who has presided over the bank’s recent dramatic retrenchment.
