Uncertainty in best of times

The debate on the global economic situation, at the World Economic Forum's annual meeting at Davos this year, is almost Dickensian: it is the best of times, it is the worst of times.

But unlike the world of Dickens, when the poor were the wretched of the earth, now it looks as though the poor countries are turning the tables on the rich, who have their own problems without fresh challenges being piled on.

There is general relief about what one speaker called the "synchronized recovery" that covers almost the whole globe (the exception being Europe).

The US is reporting China-style growth numbers and massive increases in productivity; China has turned in its best GDP growth performance in the last seven years (9.1 per cent); Japan is at last showing signs of sustainable economic recovery; and other countries in Asia (including India) have reported stellar performances. In other words, the best of times.

And yet, there is a palpable sense of uncertainty, and some speakers have even mentioned the word 'fear'. Many speakers have pointed out that the continuously falling dollar is a threat to both Europe and Japan, not to mention other countries.

Attention has also been drawn to global risk because too much money is chasing too few assets (creating an asset price bubble), while China and India are adding huge numbers to the ranks of the educationally qualified, creating excess supply in this area as well and signalling pressure from below on both blue-and white-collar wages in the advanced economies and a redistribution of global incomes in favour of the emerging markets.

This has created more divisions, with some welcoming the development as being good for everyone, while European speakers feel it is a zero-sum game because of the continent's other problems.

The stock market watchers, meanwhile, have focused on the danger of company chief executives once again looking for quantum growth in earnings in order to improve stock price valuations, and making mistakes in the process, and one speaker warned of large-scale bankruptcies in the telecom sector. The China-watchers fret about the real estate bubble in coastal China.

The strategists have their own worries because of terrorism and the tensions it has generated. As Klaus Schwab, the founder-president of the World Economic Forum, pointed out, some parts of the world cannot enjoy prosperity because of security concerns, while other parts of the world cannot have security because they don't have prosperity.

The sharp divisions of opinion are focused on almost every major economy.

With regard to the US, the head of a major investment bank argued that its fundamentals are sound, the system is deregulated and flexible enough to respond to changes, and productivity is growing rapidly.

But the pessimists argued that the twin deficits (fiscal and trade) have re-emerged, and that there is the unprecedented picture of no increase in US non-farm employment despite the recovery now being in its ninth quarter.

Also, as expounded by the representative of another investment bank, America's foreign debt is climbing rapidly and has reached 65 per cent of central bank assets, exposing the system to the risk of external shocks.

The positive view on China was easily stated, with many speakers pointing out that the Chinese leadership is focused on the problems that external observers point to (the financial system, large-scale unemployment).

The critics have pointed out that the Chinese economy is clearly over-heating because of over-investment and the creation of too much capacity, and that 9 per cent growth cannot be sustained.

But a speaker from the Shanghai stock exchange countered that there were none of the symptoms of over-heating: inflation was low, trade was in surplus and there was no full employment.

In a word, the rapid recovery and growth that is being celebrated by the optimists is, according to the pessimists, unsustainable.

Somewhere out there, they say, a systemic shock lurks. But no one can quite put his finger on the precise danger, so that the optimists continue to feel that they are right to be celebrating.