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A Davos 2019 debrief

05 February 2019 Nariman Behravesh, Ph.D.

As in past years, IHS Markit sent a delegation to the 2019 World Economic Forum (WEF) in Davos, Switzerland. The highlight of this year's IHS Markit presence at the Forum was a breakfast seminar on Tuesday, 22 January that was attended by over 80 CEOs from top global companies. The topics of discussion included the economic outlook, energy markets, and geopolitics.

The mood in Davos

Compared with the euphoric mood in Davos 2018, this year the delegates were more subdued and wary. The long list of worries included: weaker data on the Chinese and eurozone economies, Brexit, the simmering trade war between the United States and China, the stock market selloff, and the US government shutdown (which did not end until the Forum had concluded).

While many of the attendees, especially those from financial sector firms, began the gathering by expressing fears about a possible recession, by the end of the three days the mood had become less dark, with a growing sense that the global economy was slowing but not slumping. This mood swing can partly be attributed to the delegates talking to each other and hearing comments such as "I am worried about the outlook, but my company is doing OK."

Some prominent financiers were highly critical of the Federal Reserve's tightening in 2018 (both interest-rate hikes and balance-sheet reductions), blaming the financial market turmoil on the US central bank's lack of flexibility in the face of financial stress and slowing global growth. Others at the Forum warned against making the Fed the scapegoat for the many forces that are slowing global growth, including policy mistakes regarding trade.

Comments from world leaders

In a sense, the 2019 WEF was defined by the world leaders who did not show up, including US president Donald Trump and prime ministers Theresa May of the United Kingdom, Emanuel Macron of France, and Narendra Modi of India-all of whom were highlights of the Forum in 2018, but stayed home in 2019 because of domestic political challenges.

Among the leaders who did speak, perhaps the most anticipated comments were those by Jair Bolsonaro. In his short (seven-minute) speech, he made it quite clear that he was going to pursue a pro-business agenda including privatization, lowering the tax burden, reducing regulation, and tackling corruption. Like so many leaders in the past, he made a plea for global business leaders to invest in Brazil. President Bolsonaro's speech was short on specifics. Those were provided by the Brazilian economics minister, Paulo Guedes, who was also in attendance. The new president was asked about his prior, unfriendly comments regarding environmental policies. His answer was that the goal of environmental protection needs to be balanced against the goal of economic development. Both deserve equal weighting, Bolsonaro concluded.

Comments by Prime Minister Shinzo Abe of Japan and Chancellor Angela Merkel of Germany were also intended to be reassuring at a time of high anxiety. Abe talked about the progress made by Japan during his tenure (higher wage and productivity growth and rising labor-force participation rates among women and older workers), and asserted that "defeatism about Japan has been defeated." He said two of the areas of focus during the upcoming G20 meeting (to be hosted by Japan) will be data governance, as well as innovation for carbon capture and other ways to meet global climate-change targets. He emphasized that the United States, Japan, and Europe should cooperate to make the World Trade Organization more relevant in a world of data- and technology-driven trade.

Chancellor Merkel provided a strong endorsement of the existing global architecture, pointing to the hundreds of millions of people who have been lifted out of poverty in recent years. She also pointed out that this architecture needs to be updated to meet the challenges of big data and artificial intelligence. Merkel said that Germany faces three big challenges: meeting environmental goals, preparing for the digital revolution, and dealing in a humane way with migration. The chancellor said that Europe should resist the forces of nationalism and isolationism, and stated strongly that the only way to deal with the challenges facing Europe is in the context of a strong European Union.

Other European leaders-in particular, prime ministers Giuseppe Conte of Italy and Pedro Sánchez of Spain-provided divergent visions of Europe's future. Conte talked about "Europe of the people, by the people, and for the people." Sánchez described his government as "feminist, ecological and pro-Europe." Conte called for power to be handed back to the Italian people, who felt deceived by the promises made about the benefits of a single currency and other EU institutions. In contrast, Sánchez called for Europe-wide cooperation to tackle issues such as inequality and environmental degradation. He bemoaned the rise of "reactionary populism and far-right political parties."

Tensions among European leaders were also apparent on more specific issues. Prime Minister Rutte of the Netherlands criticized the EU for being too soft on Italy's breaching of budget rules, agreed to by prior governments. Prime Minister Mateusz Morawiecki of Poland censured Italy and the Netherlands for low tax rates.

Perhaps the speech that got the strongest reactions was that of Chinese vice president Wang Qishan. He said that China's current success should be viewed in the context of the country's long history, and that over a 70-year period the Chinese Communist Party had succeeded in transforming a weak agrarian state into the world's second-largest economy. He made frequent references to China being on a "socialist path with distinctive Chinese features." Wang also made references to imbalances in China's economy and the need for structural reforms. He admitted that this is an area where China's success has been limited. He warned of the importance of respecting national sovereignty and asked that nations refrain from seeking "technological hegemony." Wang said that Western economies put too much importance on efficiency and not enough on equality.

There was an unusual amount of pushback at this year's WEF regarding comments by Chinese officials-more so than in prior years. Some pointed out that the first 30 years of Communist Party rule in China were a disaster, including the Great Leap Forward and the Cultural Revolution. Others worried that artificial intelligence (and other new technologies, as well) in the hands of repressive regimes could be very dangerous. Some also pointed out the irony that, notwithstanding Wang's assertion about inequality in Western economies, China has experienced one of the most rapid increases in inequality over the past couple of decades.

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