Caution despite optimistic times? Leaders at Davos 2023 discuss why

By 2023, all the advanced economies will have completely recovered to pre-pandemic economic output, the World Bank declared. An air of joy can be sensed as the world moves back to normal with a global growth rate of 2.7%. Post-pandemic, all kinds of hopes seem to be attached to the recovery from economic repression. 

Lawrence H. Summers, Charles W. Eliot University professor at Harvard University and former US Secretary to the Treasury, pointed out numerous reasons for the “exhilaration of relief at Davos” as he and other leaders including Geoff Cutmore, Financial Journalist for CNBC Europe; Kristalina Georgieva, Managing Director of the International Monetary Fund; Christine Lagarde, President of European Central Bank; Bruno Le Maire, Minister of Economy, Finance and Recovery of France; and Kuroda Haruhiko, Governor of the Bank of Japan, gathered to discuss the current Global Economic Outlook. 

“Hyperpopulists lost elections and accepted their defeat. Europe has not frozen. Recession has not come. China has adjusted its policies towards the world and inflation has decelerated. These are all positive things and reasons why we should feel better than we felt a few months ago,” he noted. 

Georgieva built on, “What is positive is that we have seen demonstrably the strength of labour markets translating into consumer spending and keeping the economy up.”

However, in the very next part of Summer’s speech, he warned, “But relief must not become complacency.” The issues of fragmentation, surging prices of oil and energy, a persistent rise in inflation, global debt, cost of living and poverty, labour strife, and tightening financial conditions by central banks make it too early to rest easy.

“Be careful to not get on the other side of the spectrum from being too pessimistic to being too optimistic. Stay in the middle of realism that seems to serve the world well,” urged Georgieva. 

Inflation and fragmentation

One of the greatest challenges triggered by the pandemic is fragmentation in global financial markets. As the economy stagnated and the inflation rate kept on increasing, the risk of fragmentation saw a rise. 

Much to the world’s delight, post-pandemic inflation is witnessed to be going down with proper supply chain management and improvement of consumer demand. Lagarde said that the transition of the economy from the defense to competition mode is a positive sign of recovery. Hence, this made it just the right time for leaders to appeal against the fragmentation of economies.

Georgieva advised, “Be pragmatic. Collaborate. Do the right thing. Keep the global economy integrated for the benefit of all.”

On the other hand, highlighting the importance of prioritising local issues such as handling of national debt and challenges faced in thinly populated regions of industrial countries, Summers added on the subject of fragmentation, “Global integration must never be a primary cause of local disintegration if that integration is going to continue with all of the benefits it can bring.”

However, the conversation ultimately spiralled back to inflation and how long it will take to let the economies stand stable. It is an important moment for the world because if this relief manifests into complacency, as Summers said, it is bound to have a continued negative impact on the lower-income groups that bear the repercussions of the adjustments. In addition, substantial risks to the stability of economies are inevitable. 

Summers warns, “Just as transitory factors elevated inflation earlier, transitory factors have contributed to the decline that we have seen in inflation. And as with many journeys, the last part is often the hardest.”

Reopening of China

In 2022, China registered a lower growth rate when compared to the rest of the globe, something that has not happened in the past four decades. Cutmore noted that the often-quoted proverb, “America sets the interest rate, China determines the growth rate,” might be inapplicable to this year. 

However, with the reopening of China, the tables are likely to turn again. Georgieva shared an approximate growth rate for the globe at 2.7% and for China at 4.4%.

Despite the positive numbers, the leaders highlighted the potential negative impacts it can create on many. Georgieva pointed out that the improved growth rate in China, the largest oil importer in the world, can possibly manifest itself into a surge of oil and gas prices for the rest of the world.

Adding on to the discussion, Lagarde said that the waking up of China and the added demand can act out as inflation and repression for many. She called attention to the fact that the level of energy, oil and gas consumed by China has been much less than they are likely to consume in the current year. The increased demand together with a lack of spare capacity for oil and gas can become a massive constraint driving inflation still higher.

The green transformation

The pandemic has, undoubtedly, accelerated the pace at which digitalisation was being carried forward and climate issues were dealt with. With each country experiencing the effects of global warming through heat waves, severe yet shorter winters, forest fires and rise in sea levels, the conversation of decarbonisation and green transformation has become significant to the time and age.

Summers indicated that the world needs a subsidiary war over a trade war with respect to green transformation and rapidly accelerating the transition towards renewables. 

He beseeched the world for a unified approach, “So, yes, let’s compete on that. But let’s compete by how hard we try and how much we subsidise, and not by how we wall off others or try to take down others."

"We need to win in a positive-sum way, by building ourselves up rather than by seeking to tear others down. And if we can do that, I think there’s enormous potential in this moment.”

Kuroda informed the panel that the Japanese government is determined to invest one trillion in green technology in the next ten years.

Georgieva called for more thorough planning as far as the green transformation is concerned. She specifically talked about the incompetency of policies in established economies such as the US and Europe when applied to the developing world, for example the idea of employing public money to accelerate the green economy to further step up private investments. Such private-public partnerships have already proven dubious in emerging markets and to continue with this approach might not serve the developing world.

Le Maire stressed the importance of decarbonisation as he stated that it will lead to the reconciliation of growth and the economy. He concluded, “There is a place for all of us in the… decarbonisation of economy.”