Policymakers, journalists, corporate highfliers, celebrities and academics alike attended the World Economic Forum (WEF) annual meeting in Davos from January 22nd to 25th 2014, where the general consensus was that the outlook for the year ahead was brighter and more promising than it had been for several years. Despite the fact that the currencies of several key emerging economies went into free-fall that same week, the summit ended on a similarly positive note with the key takeaway being that 2014 would be the year when the global economy would return to “normal”. There were three lessons from Davos 2014, however, which highlighted significant challenges facing the global economy in 2014, namely, the eurozone is not out of the woods yet, Iran is ready to do business with the rest of the world again and long-term employment rates are being threatened by advancements in technology.The theme of this year’s meeting was “The Reshaping of the World: Consequences for Society, Politics and Business”, acknowledging the recovery but also the need for structural adjustments across the global economy.
Deflation in the Eurozone?
- Christine Lagarde, Head of the International Monetary Fund (IMF), warned of the “very real risk” of deflation becoming an issue in the eurozone in the medium-term. Inflation of just 1.2% is on the cards in 2014 for the region, well below the European Central Bank’s (ECB) target of 2.0% price growth and less than the 1.7% forecast for Japan which has famously struggled with inflation for the last two decades. Given rising unemployment rates and particularly the chronic youth unemployment rates in the eurozone, falling prices would further harm real economic growth prospects and widen inequalities in the region. Mario Draghi, President of the ECB, also said at Davos 2014 that he would not rule out the possibility of a quantitative easing, asset buying programme if the threat of deflation worsened in the eurozone in 2014;
Iran Wants to End its Political and Economic Isolation
- The Iranian president, Hassan Rouhani, attended the meeting, the first time an Iranian president in a decade had been to Davos in a decade, to outline his plans to re-integrate Iran back into the global economy and to “normalise” relations with the USA and the EU. While Rouhani didn’t say anything ground-breaking in terms of nuclear power, he was certainly enthusiastic about reviving the Iranian economy which shrank in real terms by 1.4% in 2013 and is forecast to see real growth of just 1.1% in 2014. However, this was an important first step in ending Iran’s political and economic isolation, especially if it leads to sanctions on Iranian exports being lifted by the USA and the EU, but also because Iran has the potential to become one of the biggest economies globally in US dollar terms in the long term. Easing geo-political tensions between Iran and its neighbours would also put downward pressure on oil prices, making energy more affordable and more secure for businesses and consumers everywhere;
Technology Threatens Future Job Creation
- Finally, opinions were strongly divided on the role of technology in the global economy. Many expressed fears that jobs in services in developed economies (middle managements) and manufacturing in emerging economies (lower levels) would be replaced with automated computers in the near future. Instead of being an enabler for people to be more productive and more efficient, technology would ultimately eliminate the need for people in the workplace, making high unemployment rates the norm, rather than the exception, which would widen income inequalities. The more optimistic attendees countered this argument by saying that technology may reduce the demand for certain skills but in doing so it would create demand for different skills which would ultimately create even more jobs.
The mood post-Davos 2014 is one of cautious optimism and there is a sense that the global economy needs to be “reset” to deal with new challenges and to ensure greater resilience for future shocks. Downside risks still exist across all regions of the world but hopefully the lessons learned at Davos 2014 will help economies navigate these challenges without hindering real economic growth prospects.
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