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'I am optimistic': Top economist examines the state of the global economy on Radio Davos

Despite growth across economies, a range of issues continue to hinder the global economy

Despite growth across economies, a range of issues continue to hinder the global economy Image: REUTERS/Francis Mascarenhas

Spencer Feingold
Digital Editor, World Economic Forum
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Davos Agenda

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  • The World Economic Forum's Chief Economists Outlook found that economists are divided on the likelihood of a global recession.
  • The report found that the global economy continues to be hindered by “persisent headwinds.”
  • Christian Keller, the Head of Economic Research at Barclays, joined Radio Davos this week to discuss the report and the state of the global economy.

Despite growth across economies, a range of issues continue to hinder the global economy. Encumbrances include inflation, geopolitical tensions and banking distributions, among others.

As the World Economic Forum’s latest Chief Economists Outlook notes, there is “continuing fog of ambiguity that clouds many economic developments.” Yet amid the uncertainty, there are some signs of confidence, certain economists say.

Christian Keller, the Head of Economic Research at Barclays, joined Radio Davos this week to discuss the state of the global economy and explore what likely lies ahead for consumers, businesses and policymakers.

Below is an edited transcript that features some of the key highlights:

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How are high interest rates impacting various economic sectors?

“Central bank actions in the past have kept monetary policy very expansive. That has led markets getting used to very low interest rates and therefore taking on risks that they otherwise probably wouldn't.

“Obviously we have seen very large increases in interest rates, very rapid increases. The levels of interest rates are still not far away from where we were in history, but the increase came very rapidly. And this, of course, creates stress wherever that exposure to higher interest rates is very large.

“We've seen this now in some regional banks in the US, but we've seen it also before in other places like UK pension funds. The triggers are different and the exact dynamics are never exactly the same, but the underlying is always that they were betting on rates or were not ready to see interest rates go up so rapidly.”

Has recent distress in the banking sector dampened economic optimism?

“They certainly had an effect on banking sectors. The episode earlier in March has shown that banks obviously are in an environment now where they can be vulnerable to the risks of being exposed to longer term interest rate exposure.

“And, at the same time as banks are in the business of maturity transformation, they're exposed to a loss of confidence and the potential withdrawal of deposits. In March, this was the cause ultimately for the runs on not only Credit Suisse, but also Silicon Valley Bank, Signature Bank and some other regional banks that had heavy deposit losses.

Financial Sector Tremors.
Financial Sector Tremors. Image: Chief Economists Outlook, World Economic Forum, May 2023

Were the banking crises isolated incidents or signs of larger systemic vulnerabilities?

“If you look at the exact dynamics and the various steps and exposures, for example, at Silicon Bank, they're very particular. So that's why I think it is fair to say that it's an isolated event.

“Now, what we also have learned, however, given that we had similar events, is that other institutions are prone to eventually face difficulties as interest rates go up and probably stay higher for some time.

“You have a lot of exposure also, for example, in real estate. And you will have banks that are exposed to real estate or other institutions that are exposed to real estate. It's just one example. I don't want to pick on one sector, but everywhere you have this exposure it's likely that there will be business models that didn't have high enough margins and relied on and continued being able to finance themselves at very, very low rates. So you should have further fallout.

“I think the difference is whether one believes that it turns into a systemic crisis, i.e. something akin to 2008 and '09. And that's where we and many other economists are probably more optimistic. And that's why I think you get this kind of apparent inconsistency where people say this was idiosyncratic, but at the same time, we will see more. But overall, we’re not necessarily in a systemic crisis.”

Is a robust government industrial policy the new norm?

“I think it is. I think it has become clear during the pandemic that one wants to be more resilient. And I think the pandemic has also made countries more aware of potential geopolitical risks.

“China for a long time has already permanently had some kind of industrial policy. And that has become clear now to Western countries that if one large player like China is having one and the rest plays in a free trade WTO system, that can lead to disadvantages. So I think there's a certain reaction to that.

“And, of course, the desire to make the transition to a greener economy is also asking for a bit more state intervention. I think you take all these together and you have a larger state involved in playing a bigger role in investments in particular, and in trying to direct those investments.”

New era of industrial policy
New era of industrial policy. Image: Chief Economists Outlook, World Economic Forum, May 2023

Are you optimistic about businesses adapting to shifting supply chains?

“I am optimistic. I think there is no doubt that if you were a company that had extensive production lines and also markets to sell in Russia and Ukraine, the immediate impact you're feeling now is negative. And the same if you are very involved in China and you wonder how you possibly shift away from that.

“Now if you move beyond the next few years, I think we see technology developments that could be boosting productivity. And productivity has been very difficult to predict. If you look at history, it often happened long after certain inventions and only when things moved from an invention into general purpose technologies.

“I think some of the things we're seeing in artificial intelligence are moving in that direction, i.e., general purpose technologies. So I'm actually quite optimistic about companies being able to use those, exploit those and possibly overcome some of the inefficiencies that are created by certain aspects of deglobalization.

“So while there is currently lots of stress because we are in the transition. Medium term, I think there will be new efficiency gains that should help companies.”

Are you optimistic about the global economic outlook overall?

“Overall, yes. Because one always has to think of the perspective. Could it be better? Of course. But I'm actually quite optimistic from where I thought we would be six months ago.

“Some things, like the European energy situation, have turned out better than we thought. China opened earlier than we expected. The US has been more resilient so far.

“However, I'm still concerned about food prices. Energy is coming down, but food prices have been high. I think that continues to be a concern.”

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