Veterans of the annual World Economic Forum in Davos seized on the
wobble as a warning that expectations for a smooth upswing were
misplaced, and that recovery would likely be volatile and uneven.
The euro zone crisis is out of its acute phase and growth is
returning across the developed world but a revival fuelled largely
by vast amounts of new central bank money is a capricious one.
The prospect of the U.S. Federal Reserve turning off its money taps
this year, combined with political troubles in several emerging
markets, drove last week's sell-off and exposed some of the
unresolved problems in both developing and advanced economies.
"I hear way too much optimism now," Larry Fink, CEO of investment
group BlackRock, told the forum.
"I think the experience of the marketplace this week is going to be
indicative of this entire year. We are going to be in a world of
much greater volatility."
The return of growth in the United States, Japan and Europe masks
festering problems from chronic youth unemployment to skills
shortages and rising inequality that dampened any hubris in Davos.
Tech executives were exuberant about breakthroughs that are
revolutionising production, healthcare and communication but others
warned those advances may kill jobs.
CEOs in Davos complained more vociferously than ever about a lack of
talent for hire despite sky-high unemployment in rich and poor
In the West, too many young people are graduating from expensive
colleges with high debts and the wrong skills, while in developing
countries a big majority are not achieving their economic potential.
Worldwide unemployment hit nearly 202 million in 2013, an increase
of 5 million compared with a year earlier, the International Labour
Organization reported last week.
Joe Kaeser, chief executive of German engineering giant Siemens,
questioned whether the world was really seeing an economic recovery
"Do we feel good because what we see is good?" he asked. "Or do we
feel good because we just have eased the pain? How many jobs have we
created? How many of those millions and millions of jobless people
in Europe have we put into jobs?"
The year ahead will witness a marked shift in the balance among the
world's main growth engines, with the United States and other
developed economies contributing more and emerging markets somewhat
less than before.
Reduced Fed bond buying will reverse the liquidity that has flooded
into higher-yielding emerging markets assets.
"We expected this year to be a volatile year for EM as the Fed
tapers," Mexican Finance Minister Luis Videgaray said, adding that
volatility "will happen throughout the year as tapering goes on".
Despite particular worries in countries like Argentina and Turkey,
CEOs are still determined to tap into the growing middle classes of
the new mega-cities of Asia, Latin America and Africa. But they are
becoming more selective.
The notion of lumping together diverse economies like Brazil,
Russia, India and China has gone.
BlackRock's Fink said the Fed's tapering was just an excuse for
turmoil in some emerging markets. The real cause was "bad policy" in
the countries affected.
Renault-Nissan chief Carlos Ghosn, whose company has car plants in
many emerging markets, said: "You have to be ready when you invest
in emerging markets for ups and downs."
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In the short term, investors are braced for more downs.
"We are on the cusp of a slowdown in emerging markets," said Scott
Gordon of Taconic Capital Advisors. "There is a higher proportion of
developed market growth that will drive the global economy."
Yet advanced economies also have work to do to put their houses in
"Complacency is both the positive and the negative of Davos this
year," said John Studzinski, global head of Blackstone Advisory
Partners. "On the one hand, we're not looking at the break-up of the
euro zone anymore and people are more relaxed.
"On the other hand, people are not paying attention to things they
need to, like the education reform that is needed to resolve
mismatches in the workforce, particularly in Europe and the United
Even as headline growth numbers improve, few citizens are feeling
the recovery. A survey by consulting group Alix Partners of 6,000
adults in six European countries conducted in mid-January showed 71
percent of those questioned saw the economy staying the same or
getting worse over the next year.
Christine Lagarde, managing director of the International Monetary
Fund, warned policymakers of "some of the old risks that have not
yet been completely fixed", added to which is the threat of
deflation in Europe.
A case in point is a European Union plan to curb banks' ability to
take market bets with their own money, which Germany and France have
attacked, warning in a paper seen by Reuters that it could
jeopardise a delicate revival.
In some cases, European policymakers cannot even agree on the
problems they should be tackling.
German Finance Minister Wolfgang Schaeuble publicly disagreed with
EU Economic and Monetary Affairs Commissioner Olli Rehn's view that
prolonged low inflation in the euro zone would make necessary
economic rebalancing harder.
Schaeuble called that view "nonsense".
Both Rehn and French Finance Minister Pierre Moscovici said the
European Parliament could still "improve" a complex system for
winding up failed banks agreed by the EU last month. Schaeuble said
there was little scope for change without breaching EU treaties.
Joe Jimenez, chief executive of Swiss drugmaker Novartis, said the
conversation at Davos had shifted from five years of angst over
financial crisis to talk of economic recovery, but companies were
still hesitant about the levels of investment which could drive
"If we had the certainty I think you would see more and more
companies around the world leaning forward in terms of investment,"
(Additional reporting by Alessandra
Galloni and Paul Taylor; editing by Paul Taylor and Mike Peacock)
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