In a room in Davos’s exclusive Belvedere hotel, the Duke of York was
addressing a gathering of the great and the good.
Prince Andrew, Britain’s business ambassador for the past three years, joked
that after hearing the International Monetary Fund’s grim verdict on the UK
economy – with the headlines screaming that the country would suffer the
worst recession in the advanced world - he had thought of hiring a smaller
room, in keeping with Britain’s diminished status.
But then he went on to do what the royals do best, talk the country up in
times of adversity. If Britain was suffering it was because of the openness
of the economy - “the most open in the world” - and as such sensitive to the
biggest downturn in the global economy, again according to the IMF, in the
postwar period.
But that openness would also be Britain’s great advantage, he claimed. It
would be a springboard for the upturn and it would provide global businesses
investing in Britain with a springboard for their own recoveries.
The prince left it to others to challenge the IMF’s apparent claim that
Britain was uniquely vulnerable in the downturn, which played straight into
the hands of David Cameron and George Osborne, both of whom attended the
four-day Davos meeting.
Gordon Brown, irritated to be asked how the IMF’s forecast squared with his
claim that Britain was better placed than other economies, reeled off a
series of statistics about Britain’s low public debt and the fact that
America and Europe went into recession earlier than Britain.
Downing Street officials travelling with him pointed out that the IMF’s
forecasts were just that, forecasts, and that the 2009 outlook for Britain,
a 2.8% contraction, was similar to what the Washington-based body expected
for Germany and Japan. Italy and Japan, they added, were predicted to have
longer and deeper recessions than Britain, taking 2010 into account as well.
Both Brown and his officials pointed to supportive comments on the British
government’s actions from Paul Krugman, the current Nobel laureate in
economics, and Joe Stiglitz, an earlier winner of the prize.
They could have gone further. The IMF provided a breakdown only for the
world’s biggest economies but it is clear that many smaller advanced
economies are suffering worse recessions. Ireland is officially expected to
contract by at least 4% this year, Iceland by 10%. The IMF’s forecasts for
the Asian “tiger” economies such as Singapore are for a slide of nearly 4%
this year.
The “worst affected” label weighed on some British businessmen attending the
Davos meeting. But John Monks, former general-secretary of the Trades Union
Congress, now head of Europe’s trade-union confederation, said the gloom was
appropriate.
Monks, who said he was enjoying himself after years of being patronised by the
investment banks at Davos, said: “The IMF is probably right. The combination
of individual and corporate debt is probably lethal. The squeeze on debt
means it is going to be a very rough year.” Britain’s much-vaunted
labour-market flexibility would be bad news in the recession, he claimed.
“In the upswing it can be an advantage but in the downswing it can be a big
disadvantage,” he said. “If you are a multinational company, where do you
look to cut? Certainly not France or Germany.”
British business leaders, perhaps predictably, disagreed. “It’s not surprising
that the IMF says things are looking pretty bleak at the moment, given the
effect on the financial-services sector,” said Richard Lambert,
director-general of the CBI. “But I don’t think the UK is badly placed over
the medium term. We are getting an enormous monetary stimulus, after all,
which will kick in later this year.”
Sir Martin Sorrell, chief executive of WPP, said: “The pendulum of negativity
always swings too far.” He predicted that the measures taken by the British
and other governments would start to show through later in the year. The
longer-term concern, he said, was paying off the public debt built up during
the crisis and preventing the upturn being accompanied by higher inflation.
A report published by the World Economic Forum, which runs Davos, looked into
the future of the global financial system, setting out four scenarios.
Barring a retreat into protectionism, prospects for the City would be good,
even in a world whose balance was shifting to the east.
“I’m very optimistic,” said Simon Gleeson of the law firm Clifford Chance, one
of the team that worked on the report. “In the City of London we have the
greatest concentration of financial talent that there’s ever been anywhere.”
But the last word on Britain’s vulnerability to the recession should probably
go to John Lipsky, deputy managing director of the IMF, who attended the
Davos meeting.
Its downbeat forecast for the UK was “partly happenstance”, he said,
reflecting the open economy and the problems in financial services and
housing.
But, he stressed: “There is no unique weakness in the UK economy and we are
confident that the measures being taken - nationally and globally - will
strengthen the economy over t h e medium term.”
Britain would come through it, he said, and unlike Monks, he believes factors
like the country’s labour-market flexibility will help greatly. HOW quickly
Britain and other economies come through the recession, however, was the big
uncertainty at Davos.
Brown stressed repeatedly that the key factor was international cooperation.
Without it, he said, national efforts would be less effective. With it,
while 2008 was the year the global banking system fell apart, 2009 would
mark the year that governments put in place the policies to lift their
economies out of the crisis.
But, he also warned, the risk was of a shift in the other direction - what he
described as the danger of a “deglobalisation” of the world economy.
If globalisation went into reverse, he warned, it would not just be a huge
setback for the economy. Action to tackle climate change and Third World
poverty would stall.
For “Davos man”, talk of deglobalisation is like a dagger in the heart. Even
before the annual event came to be dominated by Wall Street’s investment
banks - whose absence in numbers was tangible this year - it was a monument
to globalisation. Its members, initially dominated by the big industrial
multinationals, made money by expanding in an increasingly borderless world.
So if the Davos meeting was dominated by discussions of the financial crisis,
and how to prevent anything like it recurring, it was overlaid by another
big fear. Business and political leaders know their economic history; in the
1930s the depression was made much worse by beggar-my-neighbour
protectionism.
The fear now is, whether governments intend it or not, they are drifting into
a repeat of that episode. Lord Mandelson, the business secretary and former
EU trade commissioner, told a lunch of British business leaders that it was
essential to complete the Doha trade round as a powerful signal that the
world still believed in free trade.
But, insisting that Britain would remain an open economy, committed to free
trade, he said he was concerned about what was happening elsewhere, and
particularly elsewhere in Europe. If Britain was going to “dig ourselves out
of the hole we are in” that meant remaining open but he feared that the
level playing field in Europe was being tilted.
“We risk undoing all the good work we have done in establishing the single
market,” he said. The more countries applied state aid to prop up struggling
industries, the bigger the risk that this would become permanent, he said,
saying that he had designed the £2.3 billion of help for Britain’s car
industry specifically to avoid this problem.
The trouble is, even before France’s day of industrial action on Thursday, and
the strike at the Lindsey oil refinery in Lincolnshire over the awarding of
a contract to an Italian firm, protectionist sentiment was growing.
Critics say that governments, having rescued their banking systems and other
parts of their economies with taxpayers’ money, are facing huge pressure
from voters to ensure those rescues benefit workers, businesses and
home-owners in their own country.
Mandelson, who said he did not agree with “Buy American” or similar campaigns,
insisted no such protectionism was being pushed by Britain.
But the government’s deal with Royal Bank of Scotland over lending levels in
Britain, coupled with Brown’s attack on some of the bank’s overseas loans,
is seen by some as closet protectionism and the worry is that this can only
increase. IN the meantime, the business leaders in Davos had a more
immediate concern - when would the economic slide come to a halt? If they
were expecting clear answers from the experts, they did not get them.
All the numbers for the final weeks of 2008 point to a global economy
shrinking at an alarming pace, including a drop of more than a fifth in air
freight in December.
Policymakers insisted they had plenty more tools at their disposal, and would
use them. But in the absence of a delegation from the Obama administration
in Washington, attention focused on prospects for its $800 billion stimulus
package.
Hopes were not high. As a group of business executives were on stage offering
advice to the new president, a giant screen behind them displayed the
results of a live poll. Overwhelmingly, the participants were sceptical
about whether the Obama stimulus would work.
Later, one American, overheard in the corridor of one of Davos’s posher
hotels, was on the phone to his broker. Every chief executive he had spoken
to was “gloomy as hell” and cutting back, he said. Every economist was
warning that the American economy, which shrank at an annualised rate of
3.8% in the final quarter of 2008, had a long way to go before it hit bottom.
After a string of expletives, he said: “We’d better sell.” For once, Davos’s
magic mountain lacked even a hint of sparkle.
Enemy No1: protectionism
FEARS of a return of protectionism dominated the final day of the World
Economic Forum in Davos yesterday, with business leaders and politicians
warning that the global recession could bring new trade restrictions.
They identified it as the biggest threat to the global economy after the
financial crisis and said the two were linked.
Gordon Brown said: “There is implicit protectionism. I’m afraid of what is
happening at the moment.” He warned that the retreat of banks from overseas
markets represented a form of financial protectionism.
The disappearance of foreign banks from the UK market has been a big factor in
the credit crunch. It has meant that even when British banks have maintained
their lending there has still been an overall drop in credit flowing into
the economy.
Others warned of a more explicit protectionist threat. Pascal Lamy,
director-general of the World Trade Organisation, said: “Trade is already a
casualty of this recession. We are witnessing a huge drop in trade flows,
which in turn generates unemployment,” he said. “And, of course, the hit is
the hardest on developing countries.”
He added that trade ministers are “under domestic political pressure” and
warned that “throwing trade out with the bath water is a big mistake”.
Time and again, speakers reminded audiences that the Great Depression of the
1930s had been made much worse by protectionist policies originating in the
US.
One fear today is that when taxpayers have been involved in banking and other
rescues, they will insist that the companies saved direct their efforts
nationally rather than internationally.
