Positive Economic Outlook but Protectionism, Uncertainty and Strong Dollar Pose Risks

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  • Global growth is accelerating, with economic activity increasing in most regions of the world
  • Signs of inflation are starting to emerge as business and consumer confidence grows
  • Tail risks are substantial, however: political uncertainty, trade protectionism and the path of the US dollar could derail the reflation story
  • For more information on the Annual Meeting, see http://wef.ch/davos17
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20 January 2017, Davos-Klosters, Switzerland – Global economic activity is perking up and consumer confidence is strong, agreed panellists in a session on the final day of the World Economic Forum Annual Meeting. However, there are some significant tail risks associated with political uncertainty, trade frictions and adverse effects of a rapidly rising US dollar.

Christine Lagarde, Managing Director of the International Monetary Fund (IMF), Washington DC, was sanguine about the economic outlook. Global growth is improving, with IMF projections for economic activity to increase from 3.1% in 2016 to 3.4% in 2017 and 3.6% in 2018. “For the first time in years, economic growth is not being revised down,” she said. However, she stressed that risks abound and leaders must ensure that trade and tax policies don’t lead to a global race to the bottom.

Wolfgang Schäuble, Federal Minister of Finance of Germany, was also optimistic, citing above-trend growth in both Germany and Europe. While downplaying the risk of a significant retrenchment from globalization, he said the rise of populism and euro-scepticism must be addressed. “Brexit represents a wake-up call for Europe: we must renew our drive towards global competitiveness and economic inclusion,” he added.

“The UK economy has been resilient in the face of the Brexit referendum,” said Philip Hammond, Chancellor of the Exchequer of the United Kingdom. Indeed, the UK is the fastest-growing of the large developed economies, led by consumer demand. He expressed hope that a comprehensive free trade agreement will follow between an independent UK and the EU. “The European Union is the largest single trade partner of the UK: our collective goal is for a strong and stable EU going forward,” he added.

Across the Atlantic, the United States is seeing a resurgence in confidence, said Laurence D. Fink, Chairman and Chief Executive Officer of BlackRock, USA. The coming years are likely to see a transition from monetary policy to fiscal policy, driven by tax relief and infrastructure spending. However, questions remain as to how and when policies will be implemented and how they will be funded, he added. “The US remains the largest borrower in the world,” he said, emphasizing the need for good international relations, particularly with creditor nations. One scenario to avoid would be a vicious circle arising from a stronger US dollar and rising rates coupled with large fiscal deficits.

Japan’s economy is likely to grow about 1.5% in the coming year, outlined Haruhiko Kuroda, Governor of the Bank of Japan. “The top priority remains to overcome deflation,” he said. Since the inception of quantitative and qualitative easing four years ago, corporate profits are near record highs, unemployment is a low 3% and core inflation has turned positive. However, inflation expectations are muted and wages remain largely stagnant. The Bank of Japan has committed to an inflation overshoot, and will expand the monetary base until inflation stays persistently above 2%,” he said.

The 47th World Economic Forum Annual Meeting is taking place on 17-20 January in Davos-Klosters, Switzerland, under the theme Responsive and Responsible Leadership. More than 3,000 participants from nearly 100 countries are participating in over 400 sessions.

The World Economic Forum, committed to improving the state of the world, is the International Organization for Public-Private Cooperation.
The Forum engages the foremost political, business and other leaders of society to shape global, regional and industry agendas. (www.weforum.org).