The perfect storm: Davos looks on with worry, as oil slumps, China slows and political risks rise

PUBLISHED : Wednesday, 20 January, 2016, 2:23pm
UPDATED : Wednesday, 20 January, 2016, 2:23pm

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.

Politics are no help, with tensions mounting in the Persian Gulf 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. 

“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 toward consumption and services rather than investment and manufacturing have decreased demand and weakened the yuan. 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 Inc.

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 US$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.”

The economic slowdown and market routs may pressure policy makers to stimulate expansion.

But running deeper budget deficits would then 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 the Middle East, there are fresh fears over sectarian violence as the Syrian civil war rages, Yemen implodes, and the fault line between Sunni-ruled Saudi Arabia and Shiite-majority Iran shakes. North Korea’s fourth nuclear test has reignited tensions with Seoul, while terrorism is again a concern after the November assaults in Paris and Beirut and those this month in Jakarta, Istanbul and Burkina Faso.

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 1 per cent of people on Earth now control more wealth than the rest of the world’s population combined.

The growing inequality, together with migration from developing countries, is upending political structures in the developed world. In Germany, Merkel’s popularity is at a four- year low after the arrival of more than a million asylum-seekers in the past year. Marine Le Pen, head of the anti-immigrant National Front, tops many French opinion polls ahead of the 2017 presidential election, while surveys in Britain suggest growing support for the country’s withdrawal from the EU.

And in the US, property magnate Donald Trump has led the field of Republican presidential aspirants for months, attracting support for positions such as a ban on Muslims entering the country. That could destabilise politics in the world’s largest economy, which large companies and investors have relied on to drive growth as Europe stagnates and emerging markets underperform.

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.”