DAVOS, Switzerland — The World Economic Forum kicked off here Wednesday with a strong dose of pessimism over the global ramifications of the slowdown in the U.S. economy.
This story first appeared in the January 24, 2008 issue of WWD. Subscribe Today.
The tone was set before a day of wild swings on U.S. stock markets that ended with a surge of 2.5 percent, or 298.98 points, in the Dow Jones Industrial Average, which at one point dropped 326 points.
“This year we are experiencing doom and gloom as the world enters uncharted territory,” Klaus Schwab, WEF founder and executive chairman, told delegates. “Irrational pessimism is as damaging for us all as irrational exuberance.”
U.S. Secretary of State Condoleezza Rice, in a keynote address, said, “I know that many are concerned by the recent fluctuations in U.S. financial markets and by concerns about the U.S. economy. The U.S. economy is resilient, its structure is sound, and its long-term fundamentals are healthy…and our economy will remain a leading engine of global economic growth…so we should have confidence.”
Views varied widely over the likely depth and duration of the U.S. downturn and how it will affect the rest of the global economy, especially emerging Asian powerhouses such as China and India.
Nouriel Roubini, chairman of Roubini Global Economics, told delegates the debate is not whether the U.S. will fall into recession, but the duration, predicting the decline would last as long as a year.
The Federal Reserve Board’s decision to make an emergency interest rate cut of 75 percent basis points after sell-offs Monday in global markets was necessary, but came too late to do more than make the U.S. recession “slightly more shallow and less protracted” because of the depleted finances of American consumers and the severely stressed banking system, he said.
Rob Portman, former director of the U.S. Office of Management & Budget, said the slowing economy “will affect the budget deficit negatively.”
Although Portman said in an interview the U.S. downturn “can be shaken off by the end of the year,” he suggested that the subprime mortgage crisis would take more time to correct.
However, a former cabinet member in the Clinton administration, speaking on the condition of anonymity, said, “By 2009, we should see a turnaround. It’s not going to last something like two to three years.”
The ex-government official said he did not expect the dollar to decline much further and stressed that China should allow its currency to appreciate more. He argued that China was likely to feel the impact of the U.S. slowdown more than neighboring India, which is not as export-focused as its neighbor.
In a similar vein, Kamal Nath, India’s minister of commerce and industry, said in a news conference, “I don’t see a major impact on India,” adding that India’s economy has been driven by strong domestic demand.
“In China, India and Southeast Asia, things are moving well,” Nath said.
Earlier, Nath told an outlook session on the world economy that growth by developing countries could cushion the effect of the U.S. slowdown.
“If the argument is that the U.S. is going to drive all of the economies downhill, I wouldn’t fully agree with that,” he said.
However, Stephen S. Roach, chairman of Morgan Stanley Asia, based in Hong Kong, said hopes for a decoupling from the U.S. are a fantasy.
Meanwhile, a new report by the International Labor Organization on Global Employment Trends forecast that economic turbulence could spur an increase in global world unemployment in 2008 to 6.1 percent, resulting in 5 million additional people without jobs. In 2007, the number of people unemployed worldwide reached 189.9 million, or 6 percent.
The agency said it also expected the impact of the credit crisis this year “would result in an estimated 240,000 fewer jobs” in rich developed countries. Last year, the booming world economy created about 45 million new jobs.