Denial, Panic and Doubt in Davos

Oh, right. It's THAT time of year. When the great and good convene in Davos, Switzerland to pronounce that is all is right with the world or, if it is not, that it is certainly not their fault.

But as the following article explains, the business executives and policy makers have a conundrum to address this year. Global growth remains torpid. And a big part of the reason is that the policies business has convinced governments to support - austerity, weaker labor unions, aggressive cost cutting - have decimated the middle classes, particularly in the US and Europe, resulting in a lessening of demand for consumer goods of all types. Which means that the very impetus for growth in most developed economies has been stifled.

So business is sitting on its reserves waiting for an increase in demand that will assure an acceptably positive return on investment. Despite the fact that it is lobbying hard to command adherence to demand-destroying initiatives whose very intent militates against that.

Given the resolution of crises in Europe and the US, there is some reason to hope that pragmatism has finally overcome the alluring but impractical ideologies whose advocates bought them otherwise undeserved attention in the financialization era. The question now is whether election results in France, the US, Israel and even, however subtly, in China, signal to all that a bit more practicality might work wonders. JL

Larry Elliott reports in The Guardian:

Davos has been through some violent mood swings these past five years. First there was denial. Then there was panic. Then there was hope that the worst was over. Now there is nagging concern that this downturn simply won't come to an end Each year the consultancy firm PwC conducts a survey of the great and good of the business world. The message this year is that the improvement in sentiment seen in 2011 and 2012 has stalled. As far as business confidence is concerned there is a global double-dip recession.

It's not hard to see why. Everywhere executives look there are problems: real or prospective. In Europe, it is the impact of austerity programmes on growth and the frightening levels of joblessness. In India, it is inflation. In the United States, it is the fiscal cliff. In Japan, it is the prospect of a global currency war triggered by Tokyo's attempts to drive down the value of the yen.

David Cameron has done his bit to add to the uncertain mood. Announcing that Britain will have an in-out referendum on membership of the European Union in 2017 ensures four years in which foreign companies will be hesitant about investing in Britain.

Unsurprisingly perhaps, the PwC report shows that expectations about strong growth in 2013 are highest in the emerging world and lowest in Europe and Japan, where recent performance has been weak.

Dennis Nally, chairman of PwC International, said executives remained cautious about their short-term prospects and the outlook for the global economy. Far from planning for a robust global recovery, there is evidence that companies are hunkering down, concentrating on cutting costs and making themselves more efficient.

This matters. Many businesses are cash rich after laying off staff, mothballing investment and keeping the lid on wages, but the PwC report suggests they are in no hurry to invest their accumulated reserves.

This also comes as no surprise. Businesses will only invest if they perceive growing demand for their goods and services. But the dilemma for the CEOs gathered in Davos is that the policies they have championed in the past – fiscal austerity, weaker trade unions, aggressive cost cutting – have hammered consumer spending. In the past, spending could be supported by rising household debt, but the banks don't want to lend and consumers don't want to borrow.

This is a recipe for continued economic torpor. Three things would help: fixing the banks, a reining back of austerity and a new social compact to ensure that productivity gains are once again shared by capital and labour.