The Davos consensus spoke up loud and clear on the first day of the World Economic Forum. As I suspected, the darkness of the here-and-now permeated the Congress Center. After I laid out my bearish prognosis in the opening session – an unprecedentedly anaemic growth rate in world GDP of just 2.5% for the next three years – there were those who actually called me an optimist. The indomitable Martin Wolf, whose platform I share temporarily in penning these missives, argued that I was far too sanguine for a world that was already in a “proto-Depression” – whatever that means.
Anything is possible, of course. But I think it is important to resist the bait of oneupmanship and put this prognosis in perspective.
A year ago, denial was still very much in the air at the World Economic Forum. The Davos consensus embraced a “small problems scenario.” Most believed that any recession would be confined to the US – and that it would be short and mild. A global recession was simply inconceivable. In particular, a decoupled developing world – especially China-centric Asia – was thought to be largely insulated from any problems in the developed world and perfectly capable, in the view of many, of taking over as a new engine of global growth. And in light of a Fed-led policy stimulus, a US cyclical recovery was presumed to be just around the corner – and a pretty solid one at that. The financial system was not seen as an impediment to any of the above. In short, a year ago, the Davos consensus believed that every dark cloud had a silver lining.