Published on 22 Jan 2014

At Davos, the crisis is now off the menu

The official World Economic Forum is still discussing big global issues, and rarely an hour goes by without a panel on inequality and poverty. But Davos Man is trying to put behind him some six years of financial fear. Doom Davos and Deleveraging Davos have been replaced by Dealmaking Davos. The dust is settling.

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The world’s megabanks are sending camera crews around to pick up an “upbeat message” for their clients. There is much excitement about robots, Big Data thermostats, 3D scanning, and of course, a coming wave of massive mergers and acquisitions deals.

The key to this is what the advisory firm Deloitte identifies as a $2.8 trillion cash pile in the hands of about 400 of the world’s largest companies. The pile is double the pre-crisis level and ever more concentrated in the hands of fewer companies, such as Apple, Google and Samsung.

They may just be starting to spend. Google recently shelled out some of the pile on Nest, the designer of digitally controlled household gadgets.

On the way to Davos, I was invited to a board meeting of Siemens UK, where the bosses were clearly experiencing renewed confidence in the world economy and in Britain.

The unemployment numbers have just come in at 7.1 per cent. They are an impressive set over the three months, though the forward guidance headache looms large. Unemployment will soon hit 7 per cent (though over one month it’s up to 7.4 per cent, so maybe still a few months away).

Mark Carney is making a number of appearances this week in Davos. Businesses are anxious to hear that forward guidance will be recalibrated or reguided.

The number one fear of the people holding the investment purse strings is a too hasty normalisation of monetary policy. The Federal Reserve and the ECB are more important in this regard than the Bank of England, but this returning confidence is rather fragile.

An intriguing idea I heard last night was that when a rate rise comes, it could be a fractional rise of say 0.1 per cent or even less rather than the traditional 0.25 per cent.

Such is the sensitivity about releasing the corporate cash pile into an avalanche of investment. More on the jobs numbers, and an interview with one of those corporate titans shortly.

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5 reader comments

  1. Philip Edwards says:

    Faisal,

    Plastic Yank Carney’s 7% unemployment marker…….according to him, that’s when everyone gets a wage cut via their increased mortgage payments.

    Now, everyone knows there are many more than 2.5 million unemployed in this country. After all, the method of calculating unemployment has been changed more than thirty times since 1979 – and each time has resulted in fraudulent figures of a lower jobless total.

    So we know Carney and the rest of the spivs have decided hey! 2.5 million out of work is OK.

    Davos?….Nothing more than Las Vegas in suits. A gang of thieving yobs the lot of them. And your report – for which I thank you – shows it all too clearly, at least for those with eyes to see.

    1. Horemheb says:

      No C4 blog is complete without the rants of Mr Edwards in the comments. One wonders where he gets the time, although the message is identical for every blog, so perhaps they don’t take much re-writing…

      Although it would be good to get your facts right – I’m not quite sure how Mark Carney can be referred to as a ‘yank’ if he is Canadian. Let’s just mix up all North American together and ignore over 200 years of history. Why bother with details?

      Interesting typo in the blog though Faisal – “coming wage of massive mergers and acquisitions”. I’m sure you meant ‘wave’, but ‘wage’ is probably more appropriate. Take, for example, Anheuser-Busch InBev’s ridiculous buying back of their Korean subsidiary (I’ll ignore their equally ludicrous ‘how many merged companies can we combine in one’ name). They sold it in 2009 to KKR for $1.8 billion, but then bought it back this week for $5.8 billion. Doesn’t sound like a very good business deal, until you see that the bonus package for its top 40 executives as part of the sale was $2.5 billion. So we’ll screw the shareholders by selling it cheap but get ourselves big bonuses, and then buy it back when somebody else has increased its value.

      Meanwhile lending rates to small businesses go down. Oh dear…

  2. Andrew Dundas says:

    At last the winter of our discontent is made summer by jobs and growth. Ahead of our myths of deficit and debt.
    Our economy and standard of living were recovering nicely in spring 2010.
    Then along came the ghastly ogre of deficits and debts.
    We were told that the UK was about to become as desperate as Greece with the imminent prospect of default on our debts and spiralling interest rates, bankruptcy and worse. To rub in the point, news programmes ran scenes of riots alongside stories of banks being bailed out with government QE cheques – as if the UK didn’t deserve its rock-solid AAA rating.
    The seriously incomplete analysis of Rogoff & Reinhart had so distorted commentators views, even though R&R’s analyses did not take account of the importance of our ultra low interest rates.
    Only Paul Krugman got it right with his paean of praise “Gordon Does Good” (NYT 12/10/208) in which he urged the US to follow Gordon Brown’s lead. The USA duly did follow the UK lead and converted Paulson’s TARP into bail-outs for Lehman & AIG and the entire US auto industry. Which is why the USA and the UK are both staging faster recoveries than the defunct Celtic Tigers and the entire Eurozone: keep interest rates at the extremely low 2009 level and let deficits decline as the economy recovers from the US Recession.
    But instead we’ve had to suffer, quite unnecessarily, three years of falling real incomes and broken public services. Fortunately, the low interest & QE policy initiated in 2008 have eventually worked despite the austerity policy working against them.
    Obsession with debt is always misguided: debt is simply someone else’s savings. At low rates of inflation and (therefore) affordable interest rates, debts are much less important than changes in earnings.
    It’s taken a whole lot of personal misery to demonstrate that truth.

    1. Philip says:

      Well said. It’s worth reminding people that a rise in employment doesn’t mean traditional full time jobs – a lot are part time, zero hours, temporary. That’ why you hear wealthy employment & treasury ministers telling graduates that they shouldn’t be too proud to start off in Costa, etc. Will any of the children of Cabinet Ministers start their working lives on temporary contracts on at or close to minimum wage in Costa? If we’re going to “rebalance the economy” (& it certainly needs it), we’ve got to make financial services less attractive & get long term investment into productive industries they will provide a more diversified base for the UK economy – and more skilled jobs for UK workers. We also need to stop overblown “infrastructure” projects like HS2 and continue with the investment people really need – in housing, in removing the PFI debts from hospitals, etc, in training & retraining young people & the unemployed. In particular, we need to think of the country as a community which will function best if we develop the capabilities of everyone & provide them with the opportunity to make the best use of those capabilities, rather than keep giving the “haves” more and dripping blame on to the “have-nots”.

  3. Andrew Dundas says:

    Have we forgotten so quickly that our Atlantic economies are closely linked? Have we overlooked that credit market pricing always reflects those close links? Surely not!

    If the BoE were to raise its minimum lending rate before the US rate moved up, cash would fly into UK Bonds, pushing up our exchange rate. We can’t afford a re-valuation of the Pound to an even higher level. Because that would widen our already adverse trade imbalances. Our exports are driven by our lowered exchange rate and record low interest rates.

    Our present economic recovery depends crucially upon external trade and our 20% devaluation since 2008. That’s what’s driving the UK recovery. We can’t afford to allow our pound to rise. And that means the Bank of England’s minimum rate will stay down until after the Fed has decided to put up its rate.

    When the US Fed Chair, Janet Yellen, says up! Then the BoE will ask: “how high?”

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