Economic outlook

A 3.8 per cent annualized decline in US GDP in the fourth quarter of 2008 is just the first validation of what is likely to be a series of sharp output declines reported in the major industrial economies. Moreover, to the extent that the decline in US GDP was tempered by an unintended pile-up of business inventories, there is good reason to look for further sharp cutbacks in production in the current quarter. Elsewhere around the developed world, the results are likely to be comparable—unusually steep declines in both the fourth quarter of 2008 and the first quarter of 2009.

The question of the US reaction to China’s exchange rate policy continues to rumble in Davos, though the absence of the US policymakers makes the debate somewhat one-sided.

The response by Chen Siwei (former Vice Chairman of the People’s Congress and now Chairman of the Global Council for the Future of China), to the remarks of US Treasury Secretary, Tim Geithner, about China’s manipulation of the RMB exchange rate, can be translated as follows:

‘I don’t quite understand why he had said these unwise words, may be just to get the approval from the Senate. What I know is that he is a smart guy. I just hope he will just talk the talk and walk the walk when he is officially in office”.

It is becoming something of a cliche here to say the mood at this year’s Davos is so depressing that it is feeding the recession, rather than building a consensus on how we escape from our predicament. CEOs who arrived a little anxious about their prospects are now very worried. Those who arrived worried are now deeply depressed. Those who arrived depressed may not go home at all.

I began to wonder if this Spenglerian gloom was a financial sector phenomenon. Two invitations to talk to the automotive sector, and the Tourism and Travel group, gave me an opportunity to test that hypothesis. Sadly, it quickly folded.

The remark by Tim Geithner, president Obama’s new treasury secretary, that president Obama believes China is manipulating its exchange rate has, it can safely be said, not gone down well in Beijing.

On the contrary, it is condemned as presumptuous blame-shifting by the originator of the catastrophe. This is clear from several discussions I have heard in Davos. But I did not need to go to Switzerland to learn that.

There is little question that China is sensitive about public criticism of any kind. Nevertheless, this is not a question to be avoided. It is far too important for that.

Far too crowded. Probably 500 people over the top. Last year 2000 was heavy, 2600 is too many. Some can’t attend sessions even having tried to book online from home. Participant numbers should be reduced.

Security is also very tight, aggravated by the crush. There are heavy lines and queuing, especially early in the morning. On the other hand, this is not surprising with 40 country leaders present, many with large convoys.

Boris Johnson may well have sung for his supper, but not as beautifully as Bryn Terfel, who also told more modern jokes.

Wen Jiabao did not have them rolling in the aisles, exactly, but it was an assured performance. It’s the year of the Ox, as we know, and associated with persistence, sacrifice and plenty. The second seems to be well in hand all over the globe. We might say that governments are persistent in their attempts to stimulate their flagging economies. But “plenty” is associated with deficits more than anything else these days, which was not quite what he had in mind, I think.

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.

My good friend, Stephen Roach, Asia chairman of Morgan Stanley, disappointed me at the economic outlook session this morning. I expected him to be even more bearish than usual.It says something about the change in global mood that his forecast – a global recession this year followed by 2.5 per cent annual growth over the subsequent three years – looks almost bullish. The reality might be even worse, alas.

I chided him and his fellow panellists for their apparent complacency about what I called a “proto-depression”. What did I mean by this?

Davos blog 2009

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