Could it be time to exhale? Cautious optimism about the state of the global economy pervaded conversation at the annual meeting of the World Economic Forum, the gathering of the financial and political élite in snowy Davos, Switzerland. On the eve of the conference, Britain announced it had officially (and finally) followed France, Germany, Japan and the U.S. out of recession with positive growth in the last three months of 2009. The same day, the International Monetary Fund raised its forecast for global expansion in 2010 to 3.9%.
But at the opening session, TIME's Board of Economists a panel that has been notably bearish in the past two years was not ready to say the global economy was out of the woods. Certainly, the worst of the financial crisis and global recession may be over, but they have left a painful and troubling legacy, and there are still large uncertainties about how the global economy will develop. Among them: whether emerging economies can truly shoulder the burden of recovery, how reform of financial-sector and banking regulation will take shape and the ramifications (both economic and political) of continued high unemployment, especially in the U.S.
The discussion kicked off with a sober view of top-line GDP figures. New York University economist Nouriel Roubini the Cassandra of Washington Square, who warned long before September 2008 that there was a fundamental instability in the U.S. and global economies cautioned that the U.S., Europe and Japan could see a fresh decline in growth in the second half of the year as the effect of government stimulus funds tapers off. Since many countries have pursued increased spending, worries about inflation could have an impact on recovery. Financial markets are already beginning to wonder how long nations like the U.S. can sustain huge fiscal deficits. "There is debate about the shape of this recovery," said Roubini. Those who are optimistic think the recovery will be swift and substantial, in a classic V shape. Roubini is in the camp of those who think it will be U-shaped.
Few in Davos dissented from that somber view. But David Rubenstein co-founder and managing director of the Carlyle Group, a leading private-equity shop pointed out that buyers were returning. "I'd say it's a pretty attractive time to invest," Rubenstein said, "because prices are relatively low. I think the risk of systemic failure in the United States' financial system or the global financial system is gone. And as a result I think investors are now willing to put capital to work again and to get reasonably attractive rates of return."
Many of those investors will be looking to opportunities in what used to be called the developing world. Yet the panel struck a note of caution there too. Consumers there are not yet ready to carry the load the American consumer did during other periods of global economic turmoil, such as after the Asian financial crisis of 1997. "My sense is that what we've had is a situation of excess demand being created by the industrial countries, and now the hot potato is being shifted to the emerging markets," said Raghuram Rajan of the University of Chicago. "Historically, they've never managed it well." If a country like India, where domestic demand is strong, is to continue to grow, it needs to meet huge challenges posed by inadequate infrastructure and a massive shift of population from rural to urban areas.
Dennis Nally, chairman of PricewaterhouseCoopers, reported the results of a recent survey of nearly 1,200 business leaders worldwide. Some 39% of companies planned to hire within the next year, yet 25% still planned to cut jobs. Cost management remained a global corporate imperative. "That tells you something about how the business community is looking at the next 12 months," said Nally. Without hiring, and the money it puts in consumers' pockets, the recovery in consumption-driven countries like the U.S. is going to get only so far.