What I learned in my days on the mountain in Davos

One always learns something from the World Economic Forum. At the very least, one learns what the rich and powerful think is happening. They may be wrong: in fact, they often are. The world, as we were recently reminded, is full of surprises. But here are my reactions.

Business people feel more cheerful. Yes, they are still reeling from the legacy of covid, the post-pandemic inflationary reopening and Russia’s attack on Ukraine. They are still threatened by the enmity between the United States and China. But the news was more positive: Ukraine was doing better in its fight for survival; The Madmen fared worse than expected in the US midterm elections. Gas prices have fallen. General inflation may have peaked; Recession fears raised. China reopened.

With that background, let’s consider some of the more important topics, starting with the economic outlook.

The general mood of the economy in high-income countries is one of more optimism about the near future. However, these optimists may be getting ahead of themselves. US nominal GDP growth has been too fast to match inflation at 2 per cent. Wages in the United States have also grown nearly 5 percent over the past year, while unemployment has remained low. None of this is consistent with achieving the inflation target on a sustainable basis. If one takes the Fed seriously (I do), it would imply tighter monetary policy and a weaker economy than many expect. Alternatively, the Fed may capitulate too soon, only to have to tighten again a year or two later. As for the ECB, it is a good bet that it will seek to bring inflation back to 2 percent as soon as possible.

However, the mood in many developing countries is anxious. The legacy of Covid, soaring food and energy prices, high interest rates, and a strong dollar have put many low- and middle-income countries in serious difficulty. The concerns of some policymakers, especially from Africa, were evident.

The stories emerging from China and India, the world’s giant emerging economies, have been somewhat different. Liu He, the outgoing Vice Premier, came to tell the participants that China is not only opening up again, both at home and abroad, but also embracing its private sector. A Western businessman I know well, a longtime resident of China, confirmed this shift. A plausible explanation is that Xi Jinping decided that growth was important. This year, it will obviously be strong. It is uncertain whether the new approach will last in the long term. This is inevitable when strength is concentrated. The desire for strict control will certainly return.

Line graph of nominal domestic demand, year-on-year percentage change showing that demand is growing too fast for 2 percent inflation

The Indians were the largest delegation in Davos. Their business community is clearly optimistic about the prospects for what may now be the world’s most populous country. In fact, unless things go wrong (always possible), this should be the fastest growing economy in the world over the next two decades. Opportunities must abound.

The line graph of central bank policy rates (%) showing the central bank's tightening of monetary policy probably has a way to go

Another huge story related to trade and industrial policy. The misnamed US Inflation Reduction Act has bewitched European companies, many of which are considering moving operations there, in part to take advantage of its opportunities, but also to take advantage of lower US energy prices. This is the beginning of a subsidies war, in which the United States, with its massive federal budget, will have the upper hand, although Ursula von der Leyen, the president of the European Commission, has suggested possible responses. I have little doubt that these policies will be a waste of time. But they must accelerate the introduction of new climate technologies. Economic nationalism may now be the only way to do this. It also divides the West at a crucial moment.

The line graph of the price of oil (dollars per barrel) shows that oil prices are still far from extraordinarily high in real terms

It is almost astonishing how Catherine Tay, the United States Trade Representative, framed American trade policy in terms of workers’ interests and workers’ rights. However, it was not this that mattered most, but rather the apparent absence of any American view on how the global trading system should work. Not only did the former hegemon develop deep suspicions of China, this is truly one-party politics. I gave up on the system.

The final area of ​​focus was technology. Temporarily, I fear (and hope permanently) the hype around cryptocurrencies has subsided. This leaves open the vast improvements in global payments systems that central bank digital currencies can offer. In terms of the environment, it seems that the most exciting thing this time around is the shift towards hydrogen. This already appears as a crucial component of a more environmentally sustainable economy.

Line chart of wholesale natural gas prices (in dollars per million British thermal units) showing that the decline in gas prices has been very rapid in Europe and Asia

But the biggest fuss has been around artificial intelligence. For now, ChatGPT has stolen the show. The ability of people engaged in AI to feel unabashedly excited about their creations is as understandable as it is terrifying. The more I watch the creations of the tech industry, the more I dread watching The Magician’s Apprentice in real life. The difference is that no one has the power to stop this spell.

Finally, the attack on Ukraine was very present throughout. At the breakfast meeting, Boris Johnson is reborn, telling the audience that there is no chance that Vladimir Putin will use nuclear weapons. I hope he’s right. But the issue raised by the debate was clear: Putin’s attempt to recreate the Russian Empire could not be tolerated. It will make Europe radically and permanently insecure. It would embolden neo-imperialists everywhere. You must defeat it.

In general, the news has already been better in recent months. The lack of another major shocker is good news in and of itself. But many unresolved challenges remain, not the least of which is finding a quick and successful end to war and dealing with climate change. Things might be a little better. They are far from good.

martin.wolf@ft.com

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