Monday, January 28, 2013

Musings on Davos

Comments out of The World Economic Forum which has just wrapped up in Davos were generally more upbeat this year.  Mind you, “up-beat” is a relative concept in the post-GFC world.

I’d characterise the mood of the Forum as one of cautious optimism.  There was general acknowledgment that a lot of good work had occurred during 2012 which has helped reduce finance sector tensions.  However, a lot still needs to be done if developed economies are to achieve a higher level of sustainable growth.

European Central Bank President Mario Draghi summed it up nicely.  He said that while conditions had improved considerably in financial markets, policymakers are still waiting for signs that the real economy has turned for the better.  “We haven’t seen an equal momentum on the real side of the economy.”

There was general acknowledgment that more needs to be done. The disappointment was that, apart from continued commitment to more active monetary policy and medium- term fiscal consolidation, there was a dearth of ideas about what to actually do.  The risk is that reduced financial tension will contribute to broader policy complacency.

That doesn’t change our view of a better global growth environment in 2013, however it makes me concerned that the key developed economies might remain stuck in a low growth high unemployment rut.  Our forecast for average developed economy growth for the next three years doesn’t get above 2% per annum.  Sure, some economies will do better than others but the overall picture is not one of robustness.

It remains the case that monetary and fiscal policy can only do so much.  The OECD’s Angel Gurria said countries should “go structural” and implement difficult reforms to boost long term growth.  Yep.  A learned colleague just asked me “What’s the point to Davos?”  I replied “The more politicians hear the same message, the more inclined they may be to do something about it.”