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World: Davos WEF 2011 Briefing: Anxieties on the Rise
Nariman Behravesh's insights from the Davos World Economic Forum indicate that as jitters about a double dip are subsiding, anxieties about "grand experiments" and "end games" are on the rise.
The next few years will bear witness to the results of some rather dramatic economic experiments. Likewise, we are likely to develop a clearer senseof the sustainability of the fiscal and monetary trajectories of many of the world’s most important economies.
Grand Experiments
§ Will the United Kingdom's Aggressive Programme of Fiscal Austerity or the U.S. Push for Growth Be More Successful?: Although it will take a few years to determine which approach will be more effective, the comparison is a little unfair because the U.S. economy ismuch larger (with a higher growth potential) and the U.S. dollar is still the “safe haven” currency. Any significant action on the U.S. deficit problem seems unlikely before the 2012 presidential election.
§ Will the Chinese Renminbi Become a Major Reserve Currency Soon?: China’s leadership seems keen on elevating the status of the renminbi. However, these ambitions are at odds with the Chinesegovernment’s desire to tightly control the appreciation of the renminbi. In the end, although China’s currency is becoming more internationalised, it will be many years before the renminbi achieves the status of the dollar, euro, yen, sterling, or Swiss franc.
End Games
§ When Will the (Inevitable) Restructuring of Eurozone Sovereign Debt Occur?: Renewed financial jitters vis-à-vis theEurozone’s sovereign debt problems have begun to focus minds on the next phase of crisis management. This will very likely include a debt restructuring plan, with “haircuts” for investors and further aid for the European banks holding much of this debt. Financial markets may force such an outcome as early as this year. That said, even a “fringe breakaway” scenario for the Eurozone is still quite unlikely.§ Will China Be Able to Avoid a Hard Landing in the Next Few Years?: The Chinese government’s response to the global financial crisis consisted mostly of encouraging state-owned banks to make massive loans to local governments. Unfortunately, a large share of these funds was used for real estate investments. Quite alarming are statistics that show that the value of housing relative to GDP in Chinais now at the levels reached in Japan in 1990, before its bubble burst.
World Economic Outlook
§ The World Outlook—More Upbeat News, But Also More Volatility: The more cheerful economic news during the past couple of months points to a stronger global recovery this year. As a result, IHS Global Insight has revised its world growth forecast for 2011 upwards from 3.4% to 3.7%. Meanwhile,financial and commodity markets have been volatile. This volatility could develop into major headwinds for the world economy.
§ United States—Things Are Definitely Looking Up: Since November, most of the U.S. economic data have shown a marked improvement in growth prospects—with the major exception of housing (which contributes only 6% to GDP). The recent tax cut extension and stimulus package will,alone, add as much as 0.6 percentage point to growth this year and reduce policy uncertainty.
§ Europe and Japan—On Track for Slower Growth: The recoveries in both the Eurozone and the United Kingdom are likely to lose energy in the first half of this year because of fiscal austerity programmes and higher interest rates due to market fears about sovereign defaults/restructuring. Japan’s growthis also set to slow with the end of consumer incentives, which boosted growth in the middle of last year.
§ China—Minimal Slowing Because of Provincial Defiance: After slowing briefly, most indicators of Chinese growth are showing renewed strength. Some of the explanation for this has to do with the fact that provincial governments are not on board with slower growth. More troubling are...