The prospect of the world economy in the year 2016 was subject of heated debate on Saturday in the World Economic Forum in Davos, Switzerland.
Despite of the very low oil prices and bond yields, and adverse effects of decreasing economic growth in China on the world economy, there are reasons to remain cautiously optimistic about the trajectory of the global economy throughout 2016 and beyond, a consensus of panelists at the WEF.
Global growth in 2016 will be modest and uneven, according to Christine Lagarde, managing director of the International Monetary Fund. Global growth is estimated at 3.4% (3.1% in 2015) and 3.6% in 2017. She emphasized that “there is modest optimism but also significant risks”, which include the profound transition of the Chinese economy, lower-trending commodity prices as a result of oil prices, a downturn in Russia and Brazil, and asynchronous monetary policies of the US, Japan and Europe.
Europe’s economy is in a better shape at 1.5% growth, but Lagarde pointed to two major concerns: potential Brexit and the refugee crisis.
The UK has been a bright spot in an otherwise gloomy world economy, said George Osborne, Britain’s chancellor of the exchequer.
Another bright spot on the global stage is India with 7.5% expected growth, yet poverty still exists, said Arun Jaitley, the country’s minister of finance. “We need a high growth rate sustained over a long period of time, and the government has a list of high-priority reforms, including tax reform and bankruptcy law”.
Tidjane Thiam, CEO of Credit Suisse Bank addressed the issue of financial stability, stating that “The world has changed a lot since the financial crisis in 2008, and there is no worry about contagion risk with banks. Credit Suisse will alone be holding a total capital of $4 trillion. Even if there is a good degree of commotion, the system can withstand it. We can look forward to a normalized environment.” He also said that the market is very worried about China, “but we believe China will have a soft landing, and that the markets have overreacted to China’s situation”.
Lagarde agreed, stating that the transition of the Chinese economy, moving from industry to services, from exports to the domestic market, and from investment to consumption is a massive undertaking.
Martin Wolf, associate editor of the Financial Times, closed the intensive debate by commenting: “The basic lesson is not to be worried about markets; we have some big issues, but the US, Europe and China look okay and they are the core of the world economic system. So, it should be alright–cheer up.”
