Saturday, November 22, 2014

The Global Economy in 2014

GENEVA – At the dawn of a new year, the world is in the midst of several epic transitions. Economic growth patterns, the geopolitical landscape, the social contract that binds people together, and our planet’s ecosystem are all undergoing radical, simultaneous transformations, generating anxiety and, in many places, turmoil.

From an economic standpoint, we are entering an era of diminished expectations and increased uncertainty. In terms of growth, the world will have to live with less. To understand the implications of this, consider the following: If the global economy grew at its pre-crisis pace (more than 5% per year) for the foreseeable future, its size would double in less than 15 years; at 3%, doubling world GDP would take about 25 years.

This makes a significant difference to the speed at which wealth creation occurs, with profound effects on expectations. We ignore the power of compound growth to our detriment.

As for uncertainty, the world’s four largest economies are currently undergoing major transitions. The US is striving to boost growth in a fractured political environment. China is moving from a growth model based on investment and exports to one led by internal demand. Europe is struggling to preserve the integrity of its common currency while resolving a multitude of complex institutional issues. And Japan is trying to combat two decades of deflation with aggressive and unconventional monetary policies.

For each, the formulation and outcome of complex and sensitive policy decisions implies many “unknowns,” with global interdependence heightening the risk of large unintended consequences. For example, the US Federal Reserve’s policy of quantitative easing (QE) has had a major effect on other countries’ currencies, and on capital flows to and from emerging markets.

When QE was launched, it was the least flawed of the available policies, and it averted a catastrophic global depression. But its downsides are now apparent, and its abatement in 2014 could fuel further uncertainty.

The Fed’s QE policy, and variants of it elsewhere, have caused the major central banks’ balance sheets to expand dramatically (from $5-6 trillion prior to the crisis to almost $20 trillion now), causing financial markets to become addicted to easy money. This has led, in turn, to a global search for yield, artificial asset-price inflation, and misallocation of capital.

As a result, the longer QE lasts, the greater the collateral damage to the real economy. The concern now is that when the Fed begins to taper QE and dollar liquidity drains from global markets, structural problems and imbalances will resurface. After all, competitiveness-enhancing reforms in many advanced economies remain far from complete, while the ratio of these countries’ total public and private debt to GDP is now 30% higher than before the crisis.

This source of uncertainty coincides with weakening performance in many emerging countries. Back in 2007, emerging-market growth was expected to outpace that of advanced economies by a wide margin, before converging. Today, the advanced economies contribute more to global GDP growth than emerging countries, where growth is forecast to average 4% in the coming years.

Economic conditions are slowly improving in high-income countries, but a range of downward pressures may persist for years. The US economy, for example, remains stuck in a subpar recovery: inflation is too low and unemployment is too high. Official data have often been better than expected, reflecting how resilient, adaptive, and innovative the US economy is, but pre-crisis consumer-spending and growth patterns are unlikely to recur.

Improvements in the eurozone are real but tenuous. The good news is that the disaster predicted by many pundits has been avoided, and the recession is coming to an end. But improvement does not mean resurgence: achieving the robust growth needed to reduce high unemployment, lower the debt/GDP ratio, and improve the fiscal outlook remains elusive. The greatest risk for the eurozone in the foreseeable future is not a disorderly exit by some countries, but rather a prolonged period of stagnant growth and high unemployment.

Meanwhile, the emerging-market slowdown may well persist, particularly in the largest economies. Over the past 15 years, the BRICs (Brazil, Russia, India, and China) have achieved remarkable progress, but their reforms – including new banking regulations and currency regimes – have been among the least difficult to implement.

So-called second-generation reforms, which are more structural in nature, are vital to long-term growth but much more difficult to realize. Elimination of subsidies, labor market and judicial reforms, and effective anti-corruption measures are politically charged and often are blocked by powerful vested interests.

The global growth slowdown is taking place against a backdrop of rising economic inequality, owing to labor’s declining share of national income – a worldwide phenomenon, resulting from globalization and technological progress, that poses a serious challenge to policymakers. Systems that propagate inequality, or that seem unable to stem its rise, contain the seeds of their own destruction. But in an interdependent world, there is no obvious solution, because the high mobility of capital fuels global tax competition.

Even in stronger-performing countries, such as the US or the United Kingdom, faster GDP growth has yet to boost real incomes. In the US, for example, median household income has fallen by more than 5% since the recovery began. More generally, lower growth is fueling popular protest and social unrest, particularly in countries that were growing rapidly (for example, Brazil, Turkey, and South Africa), owing to the impact of rising living standards on expectations.

In such a charged social and political context, reviving high-quality economic growth is crucial. But where will it come from? Technological progress is a distinct, but highly uncertain, possibility. Many disruptive technologies (for example, advanced robotics, next-generation genomics, energy storage, renewable energy, and 3D printing) could drive future growth, but their full potential can be realized only in the distant future.

With most governments facing fiscal constraints, officials are reluctant to consider projects that might increase public debt. But there is some low-hanging fruit – productive investments that would boost long-term growth and therefore pay for themselves. A focus on four areas, in particular – infrastructure, education, green energy, and sustainable agriculture – could yield high economic and social returns.

Ultimately, however, the path to sustained growth requires not just new policies, but also a new mindset. Our societies must become more entrepreneurial, more focused on establishing gender parity, and more rooted in social inclusion. There simply is no other way to return the global economy to a path of strong and sustained growth.

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    1. Commentedfrancesco totino

      Political Parties don't provide a proper Public Policy mngt. Let's think a new system

    2. Commentedfrancesco totino

      G 20 Worldwide Growth Strategy and global finance rules
      If we want to have a long term balanced social developmente we need take the following actions

    3. Commentedfrancesco totino

      .. we need a new and effective global regulation of finance to overcome crises Join

    4. Commentedjean nutson

      Surely, the global economy cannot only grow and thrive on new policy formulation only,but also a change of mindsets,behavioral patterns etc, which is why the future of the global economy continues to look more murky and uncertain with hopes of economic growth and sustainability still very dim since the change of mindsets and behavioral patterns takes longer time to occur especially within a generation.

    5. Commentedcaptainjohann Samuhanand

      Sir, A 125 member delegation from India in a special aircraft is coming to DAVOS at Indian taxpayers money. For what benefit to India? NONE. Most of the big fat cats are going to straighten their illegal swiss bank accounts. the Swiss bankers and their counter parts from Isle of man,Lichenstein are now offerring 1."Cash courier".2.Larger metal vaults which can storre antiques like paintings etc,3.Virtual currencies with Bitcon ATM now operational in Zurish. These bankers are mostly targetting the Big fat cats from India,China and other third world countries which seems to be the main focus of DAVOS now.

    6. CommentedMargaret Bowker

      Regarding one of the points in the article that stood out for me - as Klaus Schwab says, rising economic inequality has the potential to slow down growth. We need people-driven recovery, with growth that ensures the vast majority who work are able to live on their wages and those who for various reasons, simply cannot work, have a finely woven safety-net. There can't be a global minimum wage, but the concept of a living wage can finally come into its own. We need policy makers to say this is above party politics, central banks to keep thinking globally as well as nationally, fiscal and monetary policy to be aware of the total scenario they create; and investors to have confidence and drive job creation even more because 2o14 has great potential. It can be a very progressive year, unwinding all stimulus measures very slowly, including dropping the UK unemployment trigger to 6.5% or lower and really slowing down, or pausing US tapering which began recently at 7%.

    7. CommentedPatrick Lietz

      Most of our economic and social woes we experienced in the last couple of years stem from the simple fact that our global business model for producing growth, economic or population wise, cannot be adjusted to a finite world with finite resources such as cheap oil, arable land and potable water.

      The currently most insidious problem for us is the stubbornly high oil price as oil extraction becomes ever more expensive. An illuminating example are the high marginal costs of shale oil extraction in the US. The oil price will stay high until demand breaks down, as customers are increasingly unable to afford this most precious of all commodities. Unfortunately, as soon as demand breaks down many small and medium oil companies will go out of business due to their high debt burdens. That means that once demand for oil is diminishing, supply will also diminish but unable to recover its current levels for the foreseeable future.

      The highly interconnected nature of finance, industry and trade with energy supply can only lead to a very somber outlook for 2014 and onwards, since none of the suggestions by Mr Schwab provide us with cheaper or more efficient ways of addressing high energy prices. This expressly includes renewable energies. This is not surprising since there are no remedies available.

      We would need to alter our growth based models, which are the cornerstones of our economies and our societal developments, to address this complex situation effectively or efficiently. However, these changes would be so drastic and fundamental in nature, on top of being prohibitively expensive, that I see virtually no possibility for these changes to occur.

      My outlook is that we will proceed with our tried and true solutions, such as QE or austerity measures, that will show ever diminishing results. The next financial shock is already looming over the financial markets. If my assumptions are anywhere close to being correct, then the 2008 crisis will look like a walk in the park.

    8. Portrait of Michael Heller

      CommentedMichael Heller

      I’m going to be annoying and take two shortcuts to critique this article. The problem was not and is not the epical or unprecedented complexity or magnitude of the crisis. Rather it is the poverty of leadership, and fear of recognizing that ‘this-time-is-not-different’.

      Two paragraphs in this article illustrate the unfortunate change in mentality.

      1. “So-called second-generation reforms … blocked by powerful vested interests”

      In the past political and business leaders did not flinch so fearfully from the old tried and tested Schumpeterian 3 ‘r’s (retrenchment, rationalisation, restructuring) of crisis recovery. That’s why the world always recovered. Now they do, which is why the world has not.

      2. “Ultimately the path to sustained growth requires not just new policies, but also a new mindset … no other way to return the economy to a path of strong and sustained growth.”

      Now political and business leaders are too uncommitted or untalented to provide leadership. Instead they write populist guff that lacks even the creativity required for credibility. The old tried and tested Schumpeterian 3 ‘r’s methods of making societies entrepreneurial in recoveries from ‘every-time-is-the-same’ capitalist crises are not in the same category as “gender parity” and “social inclusion”. Apples and oranges.

      The difference in 2014 is the unprecedented intensity of sentiment and deception. The world needs more of the ‘old’ rational rhetoric and less of the ‘new’ gorgeous guff.

    9. CommentedProcyon Mukherjee

      I distinctly remember the Davos of 2011, the retreat that brought out some of these issues Klaus Schwab is writing now, although the heightened focus then was directed towards a more lax monetary initiative, which now is slowly getting reversed as in this essay.

      The question he has not dealt with is what kind of growth are we going to pursue? Let us be honest, if the rest of the world desires to have the same American breakfast or read the same American News paper every day, either the world would have to produce forty times the current food output, or all trees would have to be felled.

      This is not going to happen; as we prepare for transitions, let us be honest that growth still today benefits largely those who do not need them. The food therefore is still aplenty and trees keep living. Reversing this with an honest attempt to socialize the benefits is hardly on anyone's mind.

        CommentedJose araujo


        Davos 2011 was a forum AGAINST monetary expansion, I clrealy remember all the fuss about asset bubbles and fear against inflation, etc etc.

        Actually, I never saw this gentlemen ever favour monetary expansion, they will allways say something like Monetary Expansion was necessary but now its time to tighten... No matter what period of time you read, they will allways be against it, and they will continue to say the same.

        They will also talk about resource scarcity and being near full employment, even when we face periods of high unemployment, they will allways say the same.

        Thats why they are called zombies...

    10. CommentedJose araujo

      Its a shame and a sign that Mr. Schwab doesn't understand the world we live in. In a period of general debt reduction, and lack of investment, it is absurd to talk about easy money.

      QE didn't cause easy money, actually, this Easy Money non-sense has been proved wrong by reality. Monetary expansion doesn't cause inflation when there is strong preference for liquidity, or risk aversion.

      By the way, just another correction. The low interest rates we are experiencing are not caused by monetary expansion, they are caused because of risk aversion. QE and Abenomics are aimed at changing the perception and getting us out of liquidity trap condictions. They were designed to do precisely the opposite of what the founder of the world economic forum is saying.

    11. CommentedBoon Tee

      Right at the dot, there is no simple way to return the global economy to a path of strong and sustained growth. Global economy in 2014 will remain sluggish, as western countries are predicted to grow at 1 to 2 %. Apparently, austerity drive has been benefiting some members of Eurozone where situations continue to remain bleak. One would anticipate the developing nations to do better, albeit slightly. (btt1943)

    12. CommentedPaul A. Myers

      Let's see: sustained economic growth requires societies to move to the new social values of entrepreneurship, gender parity, and social inclusion. Since when were social values meaningful as inputs into the great input-output machinery of a modern economy?
      And with regard to economic policies, of course more green energy and sustainable agriculture are prerequisite to the desired future, the only future we truly want. Others need not apply!
      This essay is goo-goo.
      Undoubtedly, since "the world is in the midst of several epic transitions," the epic egos of the world elite converging upon Davos next month will be able to chatter away in ever higher enlightened flights of fancy!

    13. CommentedStamatis Kavvadias

      The author writes:
      "the ratio of these countries’ total public and private debt to GDP is now 30% higher than before the crisis"
      Taking in to account the expected doubling of the global economy in 15 years, if it were growing at its pre-crisis growth rate that he mentions, the 30% growth of total debt shows an unsustainable debt growth rate, he fails to mention! This is the heritage of the growth-addicted monetary system that does not deliver its pre-crisis growth trajectory. Another 5 years of such debt patterns and we will have a literally double-deep global recession.

      Instead of identifying this fact, the author points out the effect it has on inequality:
      "The global growth slowdown is taking place against a backdrop of rising economic inequality, owing to labor’s declining share of national income"
      ...for which he blames "globalization and technological progress". Technological progress can be counterbalanced with re-distributive policies, but free global movement of capital will not allow such policies to be effective.

      There is no such thing as "tax competition" and, of course, it cannot be "global". Governments are not there as followers of market practice but as shapers of markets. The interests of peoples do not coincide with those of international commerce, much less with those of international finance. These are the reasons for widened inequality; not "global tax competition".

      The author, instead of establishing an argument for combined taxation practices of high incomes and financial transactions in advanced and BRIC economies, considers more appropriate (and maybe progressive?) that societies should change their mindset to become more entrepreneurial, so that they fit the interests of international commerce and finance. Instead of better wealth distribution and an alternative to the dysfunctional financial system, we get a Procrustean challenge to fit peoples mindsets to the doctrines of international commerce and finance.

      I am sorry to say this will not work any more. It only works for so few anymore...

    14. CommentedZsolt Hermann

      I would like to pick from the article the start and the end:
      "...At the dawn of a new year, the world is in the midst of several epic transitions. Economic growth patterns, the geopolitical landscape, the social contract that binds people together, and our planet’s ecosystem are all undergoing radical, simultaneous transformations, generating anxiety and, in many places, turmoil...
      ...Ultimately, however, the path to sustained growth requires not just new policies, but also a new mindset..."
      Indeed we are in an unprecedented turmoil which we will not be able to resolve unless we completely change our mindset.
      Even Einstein noted that we cannot solve problems from the same level they were caused at.
      This new mindset needs to extend to how we look at "growth".
      At the moment "growth" means quantitative growth with ever increasing production, consumption and profit.
      But an increasing number of people start to understand that it is impossible to maintain in a closed and finite natural system, and surprisingly before the "usual natural resources" were depleted we already exhausted the human resources.
      There is simply a limit how much people can be brainwashed to keep producing and buying excessive products that are simply unnecessary for a normal, modern human life, moreover harmful, there is a limit how far individuals and nations can tolerate the debt burden, and we have all the signs that we have already passed that limit.
      Now this new mindset necessary to solve our global problems and build a new system is a fundamentally new one, not simply a superficial change or adjustment as we usually think.
      We need to completely change how we look at our interrelationships, changing ruthless competition to mutually complementing cooperation, how we relate to the natural environment, instead of exploiting it adapting to it, and so on.
      This is almost a super-human task, but due to the multiple blows, misfortunes, the deepening crisis humanity finds itself in, human society has become "soft" at the moment, open to new ideas, open to fundamental changes provided the plan is given through positive motivation, without coercion, through transparent and scientific facts and practical realization.
      If we don't use this 'soft" opening, we will very soon harden again through extremist movements, radicalization, protectionisms and wars.
      A door opened for us and we have to enter the passage towards a new human system now.