Stefano Aversa
Partner & Managing Director, Milan
Insight
Davos 2018: what we learned from world leaders
February 13, 2018
The AlixPartners team recently came back from the annual World Economic Forum conference in Davos. Here are a few insights we gained at this year's meeting, where the theme was "Creating a shared future in a fractured world."
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The overwhelming view in Davos was that the world economy is broadly in good shape and we are enjoying a rare period of synchronized global growth. We haven’t heard similar sentiments expressed in many years. And there’s a clear reason why: 10 years after the great financial crisis, every one of the world’s major economies is growing for the first time since the downturn, and $26 trillion of wealth has been created globally.
All growth indices for 2018 are up, despite global challenges such as Brexit, North Korea, populism, migration, social divisions, terrorism, and cybersecurity threats. In the short term, many positive forces are converging and supporting this super-cycle of GDP growth: low inflation and interest rates, high stock valuations (though perhaps so high that they led to the recent market selloff), trade growing faster than GDP, high consumer confidence, IPOs, and M&A activity picking up globally.
As the global population increases, mainly in emerging markets, urbanization and technology are becoming the main drivers of the productivity increase. The other main growth factors discussed at the conference included how digitalization and other innovations are affecting sectors like biotech and precision healthcare, energy generation and storage, and intelligent buildings and cities. There was also much discussion on logistics and mobility trends of the future.
Davos attendees also discussed how the Fourth Industrial Revolution, a recurring area of focus at Davos, is impacting manufacturing and disrupting entire business models. Advanced robotics and AI applications are becoming pervasive and challenging entire job categories. Yet there are four capabilities that these technologies cannot achieve, at least for now: creativity, judgment in complex scenarios, dexterity, and compassion. Attendees discussed how jobs that rely on these human qualities are less likely to be affected.
Discussions also centered on how the US will likely attract large amounts of cash and investments because of tax reforms, economic growth, a stable environment, and relatively open borders (at least for now). As a caveat, however, the US is losing ground in education and in infrastructure. Attendees were discussing how as the US reaches full employment, inflation is going to pick up, together with interest rates, which will likely result in increasing default rates, starting with highly levered companies.
Takeaways from Davos 2018
AlixPartners Global Vice Chairman and Chairman EMEA Stefano Aversa spoke to CNBC about his takeaways from this year’s World Economic Forum in Davos. He discussed a range of critical issues facing the global economy, including growth sustainability in GDP and trade, Brexit’s impact, landmark M&A deals and IPOs, and how technology will transform the pharmaceutical, biotech, and fintech industries.
Meanwhile, China is making progress on its long journey to become the largest economy in the world. The country is expected to achieve approximately 85% of the GDP per capita of the US in the next 30 years—though that is assuming that China will be able to manage its private and local administration debt, together with potential civil unrest in certain regions. Large Chinese state-owned enterprises, supported by strong incentives and an increasingly well-educated young population, are transforming themselves into globally competitive multinationals. The factory of the world is now shifting its focus to leading technologies and engineering.
The EU is also seeing stronger growth, but Davos attendees talked about how European countries need to improve the EU’s competitiveness, which is currently supported mainly by Germany. Under President Macron, France appears to have finally embraced tax and labor reforms. But obstacles like reducing the administrative cost of central government lie ahead. Italy, Greece, and, to a lesser extent, Spain have yet to reach the economic performance levels they achieved in 2007 and also have to deal with a high level of public debt and non-performing loans currently held by their banks. In economic terms, the UK had a good 2017, with higher growth than the EU average. But the slowdown is now becoming evident in terms of investment, real estate transactions, and consumer confidence, as uncertainty about the outcome of Brexit begins to impact the economy in 2018 and beyond.
The Middle East, and Gulf Cooperation Council countries in particular, is suffering from lower oil prices and reduced consumption. As they face these challenges and improve their competitiveness, they are embracing new technologies, privatizing entire sectors, and empowering new generations (for example, the vast majority of the Kingdom of Saudi Arabia’s population is less than 30 years old).
The prevailing view was that this 2018 cyclical upturn of the global economy can become structural and sustainable through improving national and international policies and rebalancing the benefits for the whole of society.