As Markets and Growth Steam Ahead, Signs of Caution Emerge

By FeaturesDow Jones Newswires

DAVOS, Switzerland -- The world economy is accelerating and the financial markets are going gangbusters. But there is an undertone of anxiety among delegates at the annual meeting of the World Economic Forum held at this Swiss mountain resort.

The Davos meeting is famous for failing to anticipate political events: Only a tiny minority of the business, political and academic leaders that attended the forum in recent years foresaw Brexit and the election of Donald Trump. But there is strong awareness this year that geopolitical risks -- including that of a potential conflict with nuclear-armed North Korea and a U.S. trade war with China -- aren't being adequately reflected in financial-asset prices.

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In a reminder of the risks of a trade war, the Trump administration this week levied steep tariffs on imports of solar panels, aimed mainly at China, and washing machines, hitting mainly South Korea.

Geopolitics aren't the only factor driving caution. Even as the International Monetary Fund stepped up its growth projections for this year and next, Maurice Obstfeld, its chief economist, warned here Monday that "the next recession may be closer than we think," describing policy-maker complacency as the "overarching risk."

He called on governments to extend the recovery by enacting further economic overhauls and bolstering defenses against financial instability.

His message was echoed by others close to the financial markets. "Complacency in the markets is a key risk: Valuations are at unprecedented levels," said Axel Weber, chairman of the board of UBS AG, the Swiss bank, at a lunch Tuesday of The Wall Street Journal's CEO Council.

"The probability that we'll encounter an unforeseen crisis on the next part of our journey is high," he added.

André Bourbonnais, chief executive of PSP Investments, which manages close to $140 billion Canadian dollars (US$112 billion) of Canadian pension-fund assets, said in an interview. "Everyone feels, despite the exuberance in the market, that we need to dial down on the risk."

Driving the financial markets is a synchronized economic recovery in the U.S., Asia and Europe. "Markets are focused on the business cycle rather than politics," said Michael O'Sullivan, chief investment officer for international wealth management at Credit Suisse.

Most asset markets are therefore ignoring politics -- with the exception of the foreign-exchange market, he said. One possible reason for the lack of market focus on politics, said Mr. O'Sullivan, may be the growth of automated trading. "Robots are much less interested in politics than humans," he said.

So, if the markets are focused on the economic cycle, can the synchronized recovery last, particularly as central banks unravel the special measures that have driven the expansion to date?

Economists point out that the U.S. recovery is getting long in the tooth: This year, the expansion that officially began in June 2009 will become the second longest since 1857, surpassed only by the boom that ended in 2001. Europe, meanwhile, arrived much later to the party and economic momentum there has just recently picked up after its long-delayed emergence from the euro crisis.

"The question is sustainability," said Ángel Gurria, secretary-general of the Organization for Economic Cooperation and Development, the Paris-based club of industrialized nations. "It's the difference between a boom and a recovery."

The key to extending the recovery is generating more investment, he said. Growth in investment and international trade, long feeble, has been accelerating and is now roughly equal to the speed on overall economic expansion, he said. But to pull along the global economy, as a rule of thumb, trade and investment growth should be double that of the overall economy.

He echoed a widely held concern among policy makers about lingering poor productivity in Western economies, requiring significant investment in upgrading skills in workforces. The strong productivity performance of some top firms wasn't "trickling down" to others. This is one factor, he said, widening disparities in some countries between top earners and the rest that are fanning economic nationalism. Credit Suisse said Monday that for the first time, the richest 1% of the world's population in 2017 owned 50% of the wealth.

The IMF's Mr. Obstfeld said the temporary incentives in the new U.S. tax plan should help U.S. investment over the next two years and is one reason for the fund's upgraded growth expectations. But as these incentives expire, there will be "payback," with investment likely to fall back from 2020 onward, he said.

--Nikki Waller and Charles Forelle contributed to this article.

(END) Dow Jones Newswires

January 23, 2018 15:57 ET (20:57 GMT)

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