What I learnt in my days on the mountain in Davos

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You always learn something from the World Economic Forum. At the very least, you learn what rich and powerful people think is happening. They may be wrong: indeed, they often are. The world, as we have been recently reminded, is full of surprises. But here are my responses.

The business people feel more cheerful. Yes, they are still suffering from the legacy of Covid, the inflationary reopening after the pandemic and Russia’s attack on Ukraine. They are still threatened by the animosity between the US and China. But the news is more positive: Ukraine is doing better in its struggle for survival; the madmen fared worse than expected in the US midterm elections; gas prices have plummeted; headline inflation may have peaked; recession concerns have been allayed; and China has reopened.

With that background, let’s look at some of the key topics, starting with the economic outlook.

The general mood about the economy in high-income countries is one of greater optimism about the near future. Yet these optimists may be getting ahead of themselves. US nominal GDP growth has been far too fast to be consistent with 2 percent inflation. Wages in the US have also risen nearly 5 percent over the past year, while unemployment remains low. None of this is in line with the sustainable achievement of the inflation target. If one takes the Fed seriously (I do), that implies tighter monetary policy and a weaker economy than many expect. Another possibility is that the Fed gives up too early, only to be forced to tighten again a year or two later. As for the ECB, it’s a good bet that it will try to get inflation back to 2 percent as soon as possible.

However, the mood in many developing countries is restless. The legacy of Covid, high food and energy prices, high interest rates and a strong dollar have left many low and lower middle income countries in dire straits. The concerns of some policymakers, especially those from Africa, were palpable.

The stories from China and India, the world’s giant emerging economies, were quite different. Liu He, the outgoing Deputy Prime Minister, came to tell the participants that China is not only open again, at home and abroad, but is also embracing its private sector. A Western businessman I know well and has lived in China for a long time confirmed the shift. A plausible explanation is that Xi Jinping has decided that growth matters. Obviously this year will be strong. Whether the new approach is sustainable in the longer term is uncertain. That is inevitable when power is so concentrated. The urge for tight control is sure to return.

Line chart of nominal domestic demand, year-over-year percentage change showing demand has grown far too fast for 2 percent inflation

The Indians were the largest delegation in Davos. Their business community is clearly optimistic about the prospects of what is now arguably the world’s most populous country. In fact, unless things go wrong (always possible), this should be the fastest growing major economy in the world for decades to come. Opportunities should be plentiful.

Line chart of central bank policy rates (%) showing central bank likely to tighten monetary policy further

Another big story is about trade and industrial policy. The misnamed US Inflation Reduction Act fascinates European companies, many of whom are considering moving their operations there, partly to seize the opportunity, but also to take advantage of lower energy prices in the US. This is the start of a subsidy war, one in which the US, with its huge federal budget, has the upper hand, although Ursula von der Leyen, head of the European Commission, suggested possible answers. I have no doubt that this policy will be wasteful. But they must accelerate the introduction of new climate technologies. Economic nationalism may now be the only way to do that. It also splits the West at a crucial time.

Line chart of the oil price ($ per barrel) showing that oil prices are still far from exceptionally high in real terms

Almost as striking was how Katherine Tai, U.S. Trade Representative, framed U.S. trade policy in terms of workers’ interests and workers’ rights. But what mattered most was not this, but rather the apparent absence of any American view of how the global trading system should work. The former hegemony has not only developed deep suspicion of China as it is the only truly bipartisan policy; it has given up interest in the system.

A final area of ​​focus was technology. I fear temporarily (and permanently, I hope) that the hype about cryptocurrencies has died down. This leaves the field open for the dramatic improvements in global payment systems that central bank digital currencies could bring. On the environmental side, the most exciting thing this time seemed to be the shift to hydrogen. That indeed seems to be a crucial element in a more environmentally sustainable economy.

Line chart of wholesale natural gas prices ($ per million btu) showing the drop in gas prices in Europe and Asia was extremely rapid

However, the biggest hype was about artificial intelligence. ChatGPT has stolen the show for now. The ability of people involved in AI to be unabashedly excited about their creations is as understandable as it is terrifying. The more I look at the tech industry’s creations, the more I dread looking at the sorcerer’s apprentice in real life. The difference is that no one has the ability to disable this spell.

Finally, the attack on Ukraine was very present. At a breakfast meeting, Boris Johnson was reborn and informed the public that there was no chance that Vladimir Putin would use nuclear weapons. I hope he’s right. But the issue raised by the discussion was clear: Putin’s attempt to recreate the Russian empire cannot stand. It would make Europe radically and permanently unsafe. It would embolden neo-imperialists everywhere. It must be defeated.

All in all, the news has indeed been better in recent months. The absence of another huge shock is in itself good news. But there are still many unsolved challenges, not least finding a swift and successful end to the war and tackling climate change. It can all be a little better. They are far from good.

martin.wolf@ft.com

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