An unusual WEF and a new framework

After two online editions due to the pandemic, the World Economic Forum in Davos is being held starting today and running until Thursday with physical presence. Not the traditional gathering in January, but the prevailing global picture now provides thick and deep ingredients for discussion between business and political leaders who disembark in the small town of Graubünden for this unusual Spring-Summer edition. Topics are numerous, but at the moment it is perhaps interesting to try to figure out just what might emerge particularly on the three main issues that characterize the scenario: war in Ukraine due to a Russian invasion, pandemic tails and lockdowns specifically in Asia, increases in inflation and hikes in interest rates.

It is inevitable that the war conflict in Ukraine, with its load first and foremost of human losses and then also economic costs, is the focus of many presentations and debates at the Davos Forum among others. The WEF has taken a stand against aggression, the leaders of Russia are not expected to attend while the leaders of Ukraine are planned to be present, in person or by video. In the beginning, it is difficult to think that any new developments on the war in Ukraine will come out of this Forum in terms of political alignments and tactful diplomatic offensives, although any possible constructive surprises would of course be welcome. At the level of analysis, it will be important to have weighty input at least on the possible economic scenarios that will be determined by this war in the coming phase, particularly for raw materials and energy sources.

As the world's second largest economy by nominal Gross Domestic Product, behind the U.S., China is among the nerve centers for global trade. A number of the largest outbreaks of the pandemic resurgence are in China, and the authorities in Beijing are also dealing with the situation through drastic closures of economic activities, which have negative international repercussions as well. A frank discussion with the leaders of the Dragon on this would be important. But the Chinese delegation will not have a composition similar to other editions, unless there are surprises. Therefore, it will not be easy to have a broad debate. Still, it is to be hoped that at least some new insights will emerge on Beijing's positions on pandemic and global trade, as well as on economic growth and policy related to climate and the environment.

The higher rate of inflation affects everyone, albeit to varying degrees. Some countries are more impacted and others, including Switzerland, less so. There is still some growth, but the overall effect of greatly increased prices is to slow the recovery. For a long time now many central banks and governments have acted as if deflation, that is, lower prices, was the real enemy of economies. But in the end the risk as seen comes from the inflation, as had been claimed by a minority. Now that some central banks have begun to raise interest rates against inflation, and others are preparing to do so, the objection is raised from many sides that this may foster a recession. But this objection fails to take into account that high levels of inflation can also and more importantly bring recession, because the erosion of real incomes creates more uncertainty for both consumer spending and investment. If central banks were to raise rates by a lot and right away, the risk of arriving at a recession by this route would grow. But this does not seem to be the case; in fact, many central institutions have postponed or are still postponing. The picture now requires action, gradual and moderate rate hikes may be the right middle ground. It would be desirable to have a level-headed and guidance-rich discussion at Davos on this aspect as well.