Opinion – Martin Wolf: What I learned from my days on the mountain in Davos

There is always something to learn from the World Economic Forum. At the very least, you learn what the rich and powerful people think is going on. They can be wrong; in fact, they often are. As we were recently reminded, the world is full of surprises. But here are my reactions.

Entrepreneurs are feeling more excited. Yes, they are still suffering from the effects of Covid, the post-pandemic inflationary reopening and Russia’s attack on Ukraine. They are still threatened by hostility between the United States and China. But the news has been more positive: Ukraine is doing better in the fight for survival; the lunatics fared worse than expected in the US midterm elections; gas prices fell; nominal inflation may have peaked; worries about the recession eased; and China reopened.

With that background, let’s consider some of the most important topics, starting with the economic outlook.

The general mood about the economy in high-income countries is one of greater optimism about the near future. However, these optimists may be getting ahead of themselves. US nominal GDP growth has been too fast to match 2% inflation. US wages also grew by close to 5% last year, while unemployment remains low. None of this is consistent with hitting the inflation target on a sustained basis. If we take the Fed seriously (I do), it implies tighter monetary policy and a weaker economy than many expect. Alternatively, the Fed could give up too soon and be forced to tighten again a year or two later. As for the ECB, it’s a good bet that it will try to bring inflation back to 2% as soon as possible.

However, the mood in many developing countries is one of anxiety. The legacy of Covid, high food and energy prices, high interest rates and a strong dollar have put many low- and middle-income countries in serious trouble. The concerns of some policymakers, especially those in Africa, were palpable.

The stories told by China and India, the world’s gigantic emerging economies, were quite different. Liu He, the outgoing Deputy Prime Minister, came to tell the participants that China is not only open again, internally and externally, but is also embracing its private sector. A Western businessman I know well, who has lived in China for a long time, confirmed the change. One plausible explanation is that Xi Jinping has decided that growth matters. This year will clearly be strong. Whether the new approach will be sustainable in the long term is uncertain. This is inevitable when power is so concentrated. The desire for tight control will surely return.

Indians were the largest delegation in Davos. Its business community is clearly feeling optimistic about the prospects for what is perhaps the most populous country in the world today. In fact, unless things go wrong (it’s always possible), this is set to be the world’s fastest-growing major economy for decades to come. Opportunities must be plentiful.

Another big story concerns trade and industrial policy. The ill-named US Inflation Reduction Act is mesmerizing European companies, many of which are considering moving their operations there, in part to exploit its opportunities but also to take advantage of lower US energy prices. This is the beginning of a subsidy war, in which the US, with its vast federal budget, has the upper hand, although Ursula von der Leyen, head of the European Commission, has proposed possible responses. I have little doubt that these policies will be a waste. But they should accelerate the adoption of new climate technologies. Economic nationalism may now be the only way to do this. It is also dividing the West at a crucial time.

Almost equally striking was the way in which Katherine Tai, US Trade Representative, framed US trade policy in terms of workers’ interests and rights. However, what was most significant was not this, but rather Washington’s apparent absence of a vision for how the global trading system should operate. The former hegemonic power not only developed deep suspicions of China, the only truly bipartisan policy; she abandoned interest in the system.

A final area of ​​focus was technology. Temporarily, I fear (and permanently, I hope) the cryptocurrency wave has subsided. This leaves the field open for the drastic improvements to global payment systems that central bank digital currencies could deliver. Regarding the environment, the biggest enthusiasm this time seemed to be in the switch to hydrogen. This really seems to be a crucial element in a more environmentally sustainable economy.

The biggest wave, however, was about artificial intelligence. At the moment, ChatGPT has stolen the show. The ability of people involved in AI to be overtly enthusiastic about their creations is as understandable as it is frightening. The more I look at the tech industry’s creations, the more I fear I’m seeing the sorcerer’s apprentice in real life. The difference is that no one has the ability to turn off this spell.

Finally, very present throughout the summit was the attack on Ukraine. At breakfast, Boris Johnson was reborn, informing the public that there was no chance of Vladimir Putin using nuclear weapons. I hope he’s right. But the point raised by the discussion was clear: Putin’s attempt to recreate the Russian empire cannot continue. It would make Europe radically and permanently insecure. And he would encourage neo-imperialists everywhere. It must be defeated.

As a whole, the news has indeed been better in recent months. The absence of another big shock is good news in itself. But many unresolved challenges remain, most notably finding a quick and successful end to the war and dealing with climate change. Things can get a little better. They are far from good.

Translated by Luiz Roberto M. Gonçalves