It is, in case you haven’t noticed, Davos time again. In the next few days, the world’s financial elite will be at the Swiss ski resort, telling us what should and should not be done to ensure global peace and prosperity. But while Davos is great humblebrag territory – “I’ve decided to stay off the slopes. Skiing with world leaders and captains of industry never appeals” – it does give the rest of us a good snapshot of the concerns and hopes of the global business community.
This year, the meeting, which formally opened last night, is set against a more optimistic background than any since the global meltdown in 2008. For example, investor sentiment is at its highest level for three-and-a-half years, with 53 per cent of respondents to a Bloomberg poll also saying equities will offer the highest return in the next year. In another poll by the ZEW Centre in Mannheim, German investors were more optimistic than at any time since May 2010.
This uplift is shared by officialdom. The European Central Bank predicts the eurozone will start growing again later this year and its president, Mario Draghi, said earlier this month that Europe was in a “back-to-normal situation”.
Klaus Schwab, the genius who saw the need for Davos and turned a modest management conference into the World Economic Forum, is rightly worried about risks, but these are political and social as well as purely economic. A survey by the forum found that the business community thinks that income disparities and government budget deficits present the most likely risks in the next 10 years.
So I suppose you could sum up the mood as the private sector having gone a long way to setting its house in order but governments – and societies more broadly – having a huge task ahead. The positives are being reflected in the solid recovery in share prices and the switch of funds out of “safe haven” assets, notably prime government bonds. The negatives are, on this analysis, not really the fault of the business community but rather the failure of governments to control their deficits and the wider fissures in our societies, both within countries and between them.
If that is a fair characterisation of the mood of this global elite, what conclusions should the rest of us draw from it? Well, there is a cheap point to be made that the global elite did not see the recession coming. If you look at what was being said in January 2007, there was no hint of the disaster to come. Even in 2008, there were only a few voices of doom. But I think now the recovery of confidence should be welcomed.
We know a lot about global recessions and we know that the recovery is particularly slow when such downswings are associated with banking crashes. The wonderful study of such events, This Time is Different, by Carmen Reinhart and Kenneth Rogoff, showed that on average after banking crash recessions, it took four to five years for output to regain its previous peak. The US has done a bit better than that, but for the developed world as a whole, that average looks about right.
So you would expect both the huge blow to confidence that has occurred, but also by about now that a gradual recovery in confidence should be becoming evident. That does not mean that this recovery will continue in a straight-line manner, because it won’t. But we should acknowledge that a recovery in confidence is an essential precursor to a sustained recovery in the real economy. Exceptional policies – the huge deficits and near-zero interest rates – have lifted the world economy off the bottom. Wider business confidence now has to take over the baton of growth.
And inequality? That is and will remain profoundly disturbing and it is only half an answer to note that inequalities between countries are narrowing fast, though inequalities within countries have widened. But it is progress for Davos to be worrying about social inclusion, even if that is not very evident on the slopes.
We’re still not reducing the deficit
The penultimate set of monthly public accounts before the budget brings little cheer. With nine months of the financial year gone, the deficit-cutting programme remains stalled. Strip out accounting adjustments, and there has been no progress in cutting the deficit. It may be that, after adjustments, the deficit will be a tiny bit lower than last year, as the Chancellor claimed in his Autumn Statement, but it may be a bit larger.
At any rate, nine months in, total revenues are up only 0.3 per cent on the previous year and total current spending, excluding debt interest, is up 3.5 per cent. The only way the Coalition can get to last year’s borrowing is by cutting investment, which they have savaged. The revenue problem is a shortfall on income and capital gains tax, and corporation tax, which are down 1.3 per cent and 7.1 per cent respectively.
National Insurance and VAT receipts are both fine. The problem with spending? It’s complicated, but much of the trouble is that net social benefits (pensions, social security, etc) are up 5.7 per cent on 2011/12. When anyone mentions cuts, remind them of that. If you are interested, the table to look for on the ONS website is “PSF3A Central Government Account: 2012/13” (p36 of 48). It doesn’t make pretty reading.