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After The Bell: Davos, Day 5 — calming down to an Abnormal Normal

After The Bell: Davos, Day 5 — calming down to an Abnormal Normal
Christine Lagarde, President of the European Central Bank, speaks during a plenary session in the Congress Hall on the closing day of the 54th annual meeting of the World Economic Forum (WEF) in Davos, Switzerland, on 19 January 2024. (Photo: EPA-EFE / Gian Ehrenzeller)

On Friday, I attended the final session at Davos 2024 and couldn’t help reflecting on last year’s final session. By the way, I hope this is all as interesting to you as it is to me — it must sound like a humble (or even not-so-humble) brag to write about a single event five days in a row. I promise I will stop now, assisted by the fact that they’re stacking the chairs on the tables around me as I type.

The final session at Davos is always on the same topic, “The Global Economic Outlook”, and it always includes a selection of some of the top names and most important participants.

Last year, the catchphrases of the conference were “fragmentation” and “polycrisis” — both wonderful contributions to the lexicon of buzzword bingo. The participants included the managing director of the IMF, Kristalina Georgieva, and Christine Lagarde, the previous managing director of the IMF who was at that stage, as she is now, European Central Bank (ECB) governor.

The tone of the discussion was cautious-to-negative, although, unlike the World Bank, the IMF was then projecting growth for the year ahead of 2.7%. The numbers are not fully tabulated yet, but it seems growth will come in at a little higher than that, probably just under 3%. That doesn’t seem like a big miss, but the average growth rate per year over the past 50 years has been 3.4%. By this standard, the IMF forecast was overly pessimistic, a surprising change for an organisation that has habitually overestimated global growth.

As I and several hundred thousand people around the world have pointed out repeatedly, a huge proportion of economists were predicting that the US would go into recession last year, and the IMF’s undercount of global growth was almost entirely accounted for by US outperformance. The IMF estimate in January was 1.2% growth, but it seems likely it will come in at just under twice that. Not only did the US outperform, but instead of being a star pupil as the IMF predicted, it was China which underperformed marginally.

So when an organisation is this wrong, what you are hoping for is:

  1. An apology or an acknowledgement or at least a passing reference with a coy joke about the difficulty of making projections, particularly about the future; and
  2. An explanation or at least a thoughtful account of what might have caused this myopia and false news. Oh, all right then … maybe just a recognition that things didn’t turn out the way they were meant to.

This is not just a problem for the World Economic Forum of course, but it does play into a kind of mythology about Davos. And the mythology is that forum attendees are such a specialised and rarified bunch of people that their view of the world is bound to be off-kilter.

Actually, Davos-goers are much, much less homogeneous than their reputation suggests. But there have been several famous and often repeated instances where the Davos community miscued, most famously in 2016 when the conference’s 96-page report on global risks failed to mention the possibility of Donald Trump becoming president of the US or of the UK leaving the European Union. Trump was elected two weeks later and two weeks after that the UK prime minister scheduled the Brexit vote.

Anthony Scaramucci, the former White House communications director under Trump and now a Trump critic, made a joke about this group-think tendency, saying in an interview this year: “There are three reasons Trump’s not going to be president, and the first is that everyone here thinks he’s going to be president again.”

But instead of an explanation or analysis of last year’s missteps, there was some vague acknowledgement of “pessimism”, but there was also something infinitely more confusing.

In her contribution, Lagarde said although she was constrained by her position as head of the ECB, she thought one of the trends of the period was “normalisation”, but normalisation toward something that was not normality.

What does that mean? Well, she said, the Covid period was, of course, abnormal, but in 2023, we saw progress towards something more normal. Global consumption was holding up, but the tailwinds supporting it were declining. Job markets were still tight but less so. Global excess savings were almost back down to zero. Global trade declined in the first months of last year but has now picked up. And everywhere other than the eurozone, inflation was coming down.

And so on.

When you hear all of the factors listed in this way — and these are just a few — you have to have some sympathy for the enormous difficulty of making economic predictions.

But the oddity is that the IMF is once again predicting a decline in global growth. If this is true, we are not moving toward anything like a normal normal.

Allow me to try to fill in the blanks here, and by all means, shoot me down if you think I have it wrong. There are three reasons why the Davos set is too pessimistic.

First, I think we are still struggling with the psychic aftermath of Covid. It was such an unexpected, searing experience that it’s hard to shake off the sense that the world remains unhinged.

Second, I suspect, new modes of communication and data-gathering are unsettling the politics and the outlooks of elite groups. People forget the influence of radio on politics and its role in the growth of fascism. The internet is, of course, not the same, but it’s not nothing either.

Third, conferences in Europe tend to have two biases: they are dominated by people who are older and by countries that have seen their place in the world and their economies decline. Ergo, pessimism.

The big problem about not recognising your pessimistic bias is that you risk becoming a self-fulfilling prophecy. I don’t mind pessimism; I just want my pessimism to be special and unique, so please, could we rectify that problem? DM

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  • D'Esprit Dan says:

    Another great post! I find that research that comes out of the developed world (whether from the Bretton Woods institutions and similar, or from private think-tanks and companies) has an inherent developed world bias. It seldom accounts for the fact that the bulk of the world’s population lives in developing countries, with very different development drivers. Interest rates up? Doesn’t really affect the hundreds of millions of unbanked Africans without credit cards or mortgages. Maize price up? Affects consumers in poor countries disproportionately more than those in wealthy countries. Particularly the urban poor, which is an increasingly large part of the population in developing regions. The models used to determine things like GDP and consumer spending invariably don’t take account of this, or other elements like the size and growth of the informal economy, which the bulk of consumers in developing countries are participants in.

  • Tim Bester says:

    Davos is a cringe fest of note. The sooner Klaus Schwab closes the shop the better. Talk about fascists!

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