Nariman Behravesh is chief economist at IHS Markit
The mood in Davos this year could be characterized by growing optimism tinged with anxiety. This optimism is both greater and more broad-based, compared with last year, thanks to a synchronized global expansion.
The momentum of the world economy remains strong, despite continued political and policy uncertainties. This year we will see sustained, above-trend growth in the United States, Canada, the eurozone, China and Japan, along with continued recoveries in Brazil and Russia. In addition, the pervasive fears of "secular stagnation" have diminished significantly. This is evident in the significant improvement in business sentiment across the world over the past year, as measured by the IHS Markit Purchasing Managers' Indexes.
These factors lead IHS Markit to call for global economic growth rates of 3.3 per cent in 2018 and 3.2 per cent in 2019 – at or above the 2017 rate of 3.2 per cent, and up from the 2.5 per cent rate in 2016; a welcome change from the past few years.
The scenarios of pro-growth populism and protectionist populism were given roughly equal weight at this time last year. Now, there is a growing confidence in the pro-growth policies of key economies, including the United States and France. In fact, continued sustained strong economic growth may weaken the allure of populism.
The optimism in Davos was also reflected in the speeches of the many world leaders present. Nevertheless, there were differences of opinion on how to deal with the backlash against globalization. U.S. President Donald Trump proclaimed that "America First" was good for globalization, because it was pro-business and pro-growth. Other world leaders, including Prime Minister Justin Trudeau, advocated a more co-operative and multilateral approach. They condemned "poisonous populism" and protectionism, but were adamant that much more needs to be done for those left behind by globalization. Just about every leader at Davos declared their country "open for business."
Notwithstanding the upbeat mood in Davos this year, there is no room for complacency. As the global expansion is now stronger and more synchronized, derailing it would require a large shock.
The most significant "endogenous" risk to the world economic outlook is a sharper-than-expected rise in inflation. If central banks are seen to be "behind the curve," and tighten more aggressively than financial markets expect, the damage to confidence and the expansion could be substantial. Given that inflation is still modest – albeit rising – this scenario seems at least a year or two away. It remains unlikely that any major central bank would raise interest rates high enough in the next year to kill growth and derail the recovery.
Policy mistakes are also high on the list of worries. Chief among these are a trade war between the U.S. and its key trading partners; and while the risk of trade friction is uncomfortably high, the chances of an out-and-out trade war are low. Mismanaged deleveraging in China also has the potential to impact the global economic recovery, but it remains unlikely that the Chinese government would do anything to seriously harm growth.
Geopolitical risks, such as a war in the Middle East or on the Korean Peninsula, are perennial low-probability, high-impact events. Were they to occur, the damage to the global economy could be extensive.
The recovery from the global financial crisis of 2008-09 has been one of the most disappointing in the postwar period until recently. However, it is that very slowness of this expansion that has kept inflationary pressures at bay and increased the chances that the recovery will be long-lived. If left to its own devices, the world economic expansion could well continue into 2019.