Trade war, dollar danger cloud optimism in Davos

Atrade war between the United States and China and a strengthening dollar are among the biggest threats to a brightening global economic outlook, according to leading economists at the World Economic Forum in Davos. As political leaders, businessmen and bankers converge on the resort in the Swiss Alps this week, they can draw hope from a more benign economic picture and a rally in global stock markets on expectations of major stimulus under a new US administration led by Donald Trump.

The backdrop is brighter than it was a year ago, when concerns about a rapid economic slowdown in China led to what Credit Suisse CEO Tidjane Thiam described at the time as “the worst start to any year on record in financial markets ever”.

“I am more optimistic than last year. If no major political or geopolitical uncertainties materialise and derail the world economy, it might even surprise to the upside in 2017,” Axel Weber, the chairman of Swiss bank UBS and a former president of the German Bundesbank, said.

Still, there are big storm clouds on the horizon.

“It is too early to give the all clear,” Weber continued. “This cyclical upswing hides but does not solve the world’s underlying structural problems, which are excessive debt, over-reliance on monetary policy, and adverse demographic developments.”

Among the biggest concerns for 2017 cited by the half dozen economists interviewed was the threat of a US-China trade war, and broader economic tensions, triggered by what they fear could be a more confrontational Trump administration.

Trump is threatening to brand China a currency manipulator and impose heavy tariffs on imports of Chinese goods.

“This is the key uncertainty because you don’t know how much the rhetoric is a ploy to get better deals,” said Raghuram Rajan, an economist at the University of Chicago who stepped down as governor of India’s central bank last September.

“I’m worried about the people he is surrounding himself with. If they have a more protectionist world view and believe the reason the US is not doing well is because others are cheating that creates a certain kind of rhetoric that could end up very badly for the world,” he added.