By Michele Wucker
This week I arrived in Davos, Switzerland for the World Economic Forum’s Annual Meeting – the yearly Alpine gathering of business leaders, policy experts, academics, investors, and innovators to forecast and discuss the most pressing economic issues of the year ahead.
This year, forecasters are focused on the pace of the U.S. economy and Federal Reserve tapering of monetary stimulus, the dizzying heights the U.S. stock market has reached, and the impact of those on the rest of the world, including widely expected tough times in emerging markets. There’s the future of China’s economy and the future of the price of oil and its impact in the world’s petro-states –which tend to also be many of the politically troubled parts of the world. There are divided opinions over the future of the Japanese economy under Abenomics. Palpitations are growing over more extreme weather like the “polar vortex” that gripped much of the U.S. earlier this month.
What’s striking about this year’s predictions is that there are no gloom and doom scenarios on forecasters’ lists. That may be a reaction to last year’s failure, by and large, to predict stronger than expected growth in the economy. It may be wishful thinking. Either way, it represents an opportunity to focus on medium and long-term risks, especially those deemed to be highly probable and which, if those predictions are accurate, will have a major global impact.
The World Economic Forum’s Global Risks Report, based on a survey of more than 700 experts around the world who were asked to rank risks according to their probability and impact was released on January 17. The report finds income disparity is the risk most likely to cause an impact on a global scale in the next decade. Other highly probable, high impact risks include extreme weather events, unemployment, and fiscal crises.
These are the kinds of problems I dubbed “gray rhinos” at last year’s Annual Meeting in Davos: giant looming challenges that are both obvious and potentially devastating, but like their fellow pachyderm the “elephant in the room” are unjustifiably ignored.
The goal of this year’s Annual Meeting, themed “The Reshaping of the World – Consequences for Society, Politics and Business,” is “to move from urgency-driven risk management to more collaborative efforts to strengthen risk resilience.”
In other words, how do we do a better job of thinking ahead to make sure that the threats we see do not escalate out of control? How do we shift our management of crises from reactive to proactive – moving from short bursts of focus when crisis breaks out, to longer-term efforts to prevent or mitigate those crises?
Jack Rivkin, a member of the board of the World Policy Institute and chief investment officer of Altegris, is optimistic about the U.S. economy yet concerned about many emerging markets and signs of currency wars in Asia.
Eurasia Group sees geopolitical risks as high on the radar, from petro states, to Iran to China, and to disruptions from elections in Brazil, Colombia, India, Indonesia, South Africa, and Turkey.
Blackstone Vice Chair Byron Wien, whose annual “Ten Surprises” are always on the top of my list to watch, predicts “the best of times and the worst of times” for the U.S. stock market- a 10 percent correction from market extremes but a total return of 20 percent by year’s end. He and many people whose opinions I respect greatly are concerned by the record highs of the U.S. stock market.
So far it seems that China has kept ahead of worries despite many predictions of a hard landing. Its leaders certainly are aware of the importance of moving from an economy based on exports to one driven by internal demand; of addressing its environmental challenges; and of addressing its housing bubble. China is not out of the woods on any of these fronts.
On the environment, I was struck last night by a comment from another Davos attendee about an increase in the number of people moving out of China because of pollution.
On the economy, China faces a delicate balance: keeping economic growth going or risking further inflating the housing bubble. China’s monetary supply, broadly measured, has tripled since the end of 2006. Its expansion accounts for nearly half of the world’s new money supply. By contrast, M2 in the U.S. grew only 55 percent since the end of 2006. Reining that in will make the U.S. Federal Reserve’s taper of monetary stimulus look like child’s play.
China’s new president, Xi Jinping, has indicated that he wants to move quickly to implement dramatic needed reforms, but so far has been moving cautiously in a strategy some see as consolidating political power first, then moving. In that context, it’s easier to understand why China would risk international confrontation in the South China Sea over the Senkaku/Diaoyou Islands. Yet its main adversary in that conflict, Japan, also is undergoing difficult reforms for which deflecting attention to an external threat can be politically useful. That raises the potential for a disastrous misstep by either side.
China’s growth dilemma mirrors that of Europe and the U.S. –current predictions of accelerating U.S. growth notwithstanding. World Economic Forum Chairman Klaus Schwab warns that a big challenge will be to adjust to a new normal. “In terms of growth, the world will have to live with less,” said Klaus.
One of the most interesting discussion threads at Davos this week will address one approach to living with less: the sharing economy, as exemplified by new businesses like Uber, AirBNB, Brambles, andYerdle.
Let’s hope that we’ll be hearing more ideas about how to reduce inequality, build resilience to catastrophic weather events and arrest climate change, and generate economic growth that both creates jobs people can live on and heads off potential budget crises.
I’ll be tweeting from @wucker to the #wef14 hashtag this week. Follow me for ongoing thoughts on what’s in store for the world in 2014 –and what we can do about it.
Michele Wucker is President of the World Policy Institute. Her new book, The Gray Rhino: Why We Keep Missing the Most Obvious Threats –and How We Can Get Out of the Way, will be published by St Martin’s Press in 2015.
[Photo courtesy of the World Economic Forum]