Angst mounts in Davos as oil falls, China slows
Fed also unnerving financial markets by raising rates.
As the chattering chieftains of the global economy gather this week in Davos, Switzerland, they're facing the darkest outlook since the financial crisis tipped the world into recession seven years ago.
The Chinese slowdown and accompanying slide in the yuan are imperiling already sluggish international growth, oil is trading at its lowest level in more than a decade, stocks have suffered their worst January ever, and the prospects for corporate earnings are the most pessimistic in years. The Federal Reserve is also unnerving financial markets by raising interest rates.
Politics are no help, with tensions mounting in the Middle East and on the Korean peninsula, Europe's refugee crisis showing no signs of abating, and terrorists striking four continents. Economic frustrations have driven the rise of populists in the US and France while sowing doubts about the longevity of German Chancellor Angela Merkel and Britain's membership in the European Union.
"We have a coming-together of events that are confusing, volatile and dangerous," said David Gergen, an adviser to four US presidents and now a professor at Harvard's Kennedy School.
As delegates began to arrive in the Alpine resort for the World Economic Forum's annual meeting, they were faced with stark evidence of that volatility and danger: At the congress centre that serves as the hub for events, heavy concrete barriers and new watchtowers with armed guards line the roads - an addition to the security checkpoints inside the building that have been in place for several years.
And the bad news just keeps rolling in. On Tuesday, China confirmed its weakest quarter since 2009 and its slowest annual growth since 1990. The International Monetary Fund, meanwhile, cut its estimate for expansion in the world economy this year to 3.4 per cent from 3.6 per cent. European equity-index futures followed Asian stocks lower Tuesday and commodities slumped, boosting demand for haven assets amid waning investor confidence in the global economy.
Meantime, the International Labour Organisation predicted that global unemployment will climb this year by almost 2.3 million to 199.4 million, led by emerging markets. PriceWaterhouseCoopers said only about a third of chief executive officers it polled were "very confident" about their companies' growth prospects.
"I expect it will get worse before it gets better," said Nobel laureate Michael Spence, an adviser to Pacific Investment Management Co who will be in Davos.
China, which now accounts for about 15 per cent of global output and helped propel the world out of recession in 2009, lies behind much of the anxiety. President Xi Jinping's efforts to shift his country's economy towards consumption and services rather than investment and manufacturing have decreased demand from other countries, and the yuan has weakened. Those factors, combined with a botched effort to prop up stocks, have spooked investors.
"The recent China-induced financial volatility is the result of a nasty cocktail of major structural problems, slowing growth, and inept policies," said Nariman Behravesh, chief economist at researcher IHS.
There are major ripple effects. Oil is down about a fifth this year, also undermined by expectations of a surge in crude exports from Iran after the removal of sanctions. Equities have slumped, with almost $7 trillion knocked off their value globally since the start of the year. "We are entering a much, much more challenging macroeconomic environment," said Johan Burger, chief executive officer of South African lender FirstRand Ltd. "It's a global issue." - Bloomberg
Also causing some concern is the Fed's decision to raise interest rates last month for the first time in nine years even with tame inflation. That's pushed up the dollar, hurting those emerging markets that boosted borrowing in greenbacks when rates were at rock-bottom.
The economic slowdown and market routs may pressure policy makers to stimulate growth. JPMorgan Chase & Co economists last week predicted fresh support from central banks, represented in Davos by European Central Bank President Mario Draghi, Bank of England Governor Mark Carney and Bank of Japan Governor Haruhiko Kuroda.
JPMorgan reckons the Federal Reserve will now next raise interest rates in June rather than March, and the ECB will cut its deposit rate and extend asset purchases in the summer. The Bank of Canada may ease monetary policy as soon as Thursday, JPMorgan says. Still, there are questions over what central banks can achieve after years of keeping rates near zero and buying bonds, which some economists predict will spur politicians to use fiscal policy more aggressively than they have.
Running deeper budget deficits will thus join a long list of concerns for politicians confronting what Ian Bremmer, founder of consultancy Eurasia Group and a Davos regular, calls "more geopolitical instability, and therefore risk, than at any point since 9/11."
In developed countries, there is a sense of frustration as once-robust middle classes fall ever further behind the have-lots. The charity Oxfam said on Monday that the richest one per cent of people on Earth now control more wealth than the rest of the world's population combined.
With so many concerns weighing on the delegates, veteran attendee Ray Dalio, the billionaire founder of hedge fund Bridgewater Associates, said he expects vigorous discussion at Davos. But that, he says, is the whole point - and far better than the attendees being left speechless.
"I've been to so many Davoses," Dalio said, "and when it's quiet, that's when you should panic."
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