Specks of optimism after days of pessimism for world growth as Davos ends  

After days of what almost looked like a world choreographing itself to be pessimistic about the state of affairs on different burning issues  (including inequality, climate change and terrorism) the gathering of global business, political, academic and media leaders at the World Economic Forum (WEF) came to a close at the weekend with central bankers, business and economic leaders offering a ray of optimism on global economic prospect on the final day.

A powerful panel of two central bank governors, the International Monetary Fund deputy managing director, a finance minister, European Central Bank executive board member, and moderated by Larry Fink, chairman and chief executive officer of Blackrock, gave hope that a number of factors playing out in the global economic space were positive for future outlook, including this year.

The IMF has already predicted global economic growth at 3.5 percent for 2015, but the action of the European Central Bank, while the meeting was on, to embrace quantitative easing (stimulus package) along with falling oil prices, structural change in Brazil, China and Japan, and robust growth in the United States, were good for the world economic outlook.

Many on the panel welcomed the ECB’s action noting that it laid the ground for stimulus in the Eurozone, especially if governments pursued structural reforms in their individual countries. They called for labour market reforms, with Min Zhu, deputy managing director of the IMF stating: “QE creates the space for the structural reforms and investment.”

Benoît Coeuré, ECB executive board member, explaining the decision on QE said: “We have done our part, but the ECB cannot raise productivity, increase employment or encourage investment. That requires a more comprehensive set of reforms. We could not sit by and watch the political foundations of the European project being undermined.”

But while Nigeria and some other oil producing countries may currently be lamenting the fall in oil price, this is being seen as a boost to growth in most economies, which will in turn “ease the transition to structural reform,” a situation which is already playing out in Brazil. The country’s finance minister, Joaquim Levy, contributing to the discussion said Brazil was shifting from increasing incomes of its poorest citizens, a focus of the country’s economic policies for the past decades, to building investment by both public and private sectors.

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“Our goal is to make Brazil a nimbler, more agile market, where it is easier to do business,” he said.

Haruhiko Kuroda, Bank of Japan governor, said Japan was already implementing a programme that includes aggressive monetary easing, gradual fiscal consolidation, and structural reform that are intended to lay the foundations for two percent  growth this year. He said he was positive not only about Japan’s growth prospects but also about China. “China is making huge structural reforms while continuing to grow at 7.5%,” he said.

The panelists also said US economic performance was strong and provided a significant boost to global demand. However, IMF’s Zhu warned that much of the growth is coming from consumers and government spending, with private investment still relatively low.

The IMF deputy managing director called on policy-makers to put the poorest countries, which have been battered by economic headwinds, at the top of the policy agenda.

In his contribution to the discussion on the world’s growth prospect, Bank of England Governor, James Carney, drew attention to what he sees as two “false assumptions” that he worries investors will have now that Europe is awash with new money from the European Central Bank’s new quantitative easing stimulus.

Carney said there was the false assumption that “the central bank will always be there” to bail out institutions when they mess up, and added that the second is “an illusion of liquidity that has existed in a number of markets,” noting that the extra money being pumped in can make it look as if all assets can be shifted at will, when in fact, some of those markets can suddenly dry up. According to him when new money becomes available at zero interest rates, he worried that it might trigger a period of “reckless risk-taking” by some investors. “Reckless risk-taking is built on a false assumption,” he said.

At another closing panel, World Bank president, Jim Yong Kim said, the world needed to increase the impact that global growth has on the poorest, adding that improving healthcare and the quality of education are proven both to reduce inequality and foster sustainable growth.

Also speaking, the CEO and vice-chairman of Brazil’s Itau Unibanco, said that “to reduce inequality, the best answer is growth”. The world had had a tough few years but “now we are more optimistic, because the US economy is coming back. We will see better results in the next five years than we saw in the last five”, he noted.
Katherine Garrett-Cox, CEO of the Alliance Trust, UK said she was hopeful. “What I am taking from this meeting is a huge sense of urgency, especially from business,” she said.

For the executive director of Oxfam International, Winnie Byanyima, “growth must touch everybody and lift everybody if it is to be sustainable”. According to her, she had met many business leaders in the meeting, ready to commit to reducing inequality and to mitigating the impact of climate change but that political leaders are falling behind.

This was a view shared by Robin Niblett, Director of Chatham House, UK who said: “Governments are being delegitimised in many parts of the world. They are struggling to keep up”. But he also sees promising signs for 2015, including the European Central Bank’s adoption of quantitative easing and the boom in alternative energies, which low oil prices will not stop.

 

Phillip Isakpa Davos, Switzerland