By just about any measure, the global economy is doing surprisingly well: unemployment is down, markets are soaring and corporate executives believe more good times are still to come. So why is the financial elite gathered at the World Economic Forum in Davos so downbeat?
“The markets have turned a deaf ear and that’s dangerous,” said Michael Corbat, chief executive officer of Citigroup. “Because the next downturn will be much more brutal than letting a little steam out now.”
Jess Staley, the American businessman who is CEO of Britain’s Barclays Bank, also pondered whether the global boom was sustainable. “It all feels a bit like 2006, when we all wondered if we had solved the problem of recurring financial crises,” he said. “Valuations are very high by historical standards and price movements at a historic low. That’s not sustainable.”
The biggest risk to the global economy is that we are entering an inflection point where inflation is rising sharply and interest rates are moving up in high-debt countries. Kenneth Rogoff, Harvard economist
On Tuesday, the DAX-30 index of German blue chip stocks rose 0.8 percent to 13,566.52 at one point, it’s highest level ever and overtaking the record set in November of 13,478.86.
The DAX has been a little late to the party, following London’s FTSE index and the Dow Jones to record highs. According to market analysts, it was finally buoyed by an end to the US government shutdown, progress toward the formation of a German coalition government and a higher-than-expected index of economic sentiment from Germany’s Center for Economic Research, which said its index rose to 20.4 this month from December’s 17.4. Market analysts had expected the index to reach only 17.8 in January.
This year – only three weeks old – global share prices have gained $3 trillion – more than Britain’s annual economic output.
“Old economic rules, such as a lull must follow a seven-year-boom, currently no longer seem to apply,” Norbert Winkeljohann, European head of consultants PwC, told Handelsblatt. He doesn’t foresee a market decline this year because oil prices and interest rates are still low.
It’s is precisely the low-interest-rate environment that has everyone concerned. Monetary policy seems like a holdover from a depression, said Mr. Staley. He and other financial experts in Davos said they were concerned that a sudden rise in interest rates could lead to a new debt crisis. According to the International Monetary Fund, the global debt of companies, households and governments in the G20 has risen from $80 trillion to $135 trillion in the last 10 years.
“The biggest risk to the global economy is that we are entering an inflection point where inflation is rising sharply and interest rates are moving up in high-debt countries like Italy and japan,” said Harvard economist Kenneth Rogoff,
The same applies to China’s massive indebtedness. “We have too much debt in our system,” admitted Fang Xinghai, vice president of the Chinese securities supervision agency. At the same time, the ratio of private and government debt to GDP is 250 percent, he noted.
Other attendees in Davos worried that companies and investors have recently increased their debt significantly and could get into serious difficulties if interest rates suddenly shoot up. “If interest rates rise significantly over the next 12 months, there will be a lot of people who cannot repay their loans,” said Anne Richards, chief executive of British asset manager M&G Investments.
Mark Haefele, chief investment officer at UBS, warned that central banks face a difficult task trying to navigate their way from ultra-loose monetary policy. “Central banks have to achieve a delicate balance,” he said. “You have to keep the growth rate higher than the interest rate.”
Part of the challenge is that investors were caught off guard by the global stock surge at the beginning of the year, so many are now showing non-buyer’s remorse by jumping back into the market.
In Germany, for example, there are indications that the DAX will not only not fall from its record highs but go from strength to new strength.
“Setbacks that can occur at any time are in my estimation, still buying opportunities," said market analyst Stephan Heibel, who write the weekly Handelsblatt survey entitled, DAX Sentiment. Mr. Heibel believes the rally “can carry on quite well.”
Daniel Schäfer is head of Handelsblatt's finance pages in Frankfurt and Thomas Tuma s a deputy editor in chief at Handelsblatt. This article was adapted into English By Charles Wallace, an editor for Handelsblatt Global In New York. To contact the authors: [email protected] and [email protected]