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Davos participants unsure if America can power world economy

Monday, January 26, 2015 - 10:10
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For the world economy, it's a case of US and them.

[DAVOS] For the world economy, it's a case of US and them.

That was the conclusion of investors, executives and policy makers as they ended their annual trip to Davos, Switzerland last week with the US poised to outpace world growth for the first time since 1999. Celebrations were muted by questions over whether the strongest US expansion in 11 years will prove strong enough to power the global economy or whether it will be undone by slowing growth in Europe and China.

"The US can marginally help the world, but it cannot do it alone," said former deputy US Treasury secretary Stuart Eizenstat. He said there's still a 50 per cent chance that the drag from the rest of the world will prove greater than the momentum from the US recovery.

The multi-speed global economy is already threatening the US by driving the dollar to an 11 year-high against the euro, with few in Davos willing to bet against further gains for the greenback.

"Right now the US seems to be the greatest place in the world to invest," said David Rubenstein, the co-founder of Carlyle Group LP. "The biggest problem in the US is that the dollar could become very, very strong."

US economic might was on display throughout the four-day retreat in the Swiss Alps as executives such as Facebook Inc.'s Sheryl Sandberg and PepsiCo Inc.'s Indra Nooyi roamed the conference hall and companies from Salesforce Inc. to McKinsey & Co. threw splashy parties.

GLOBAL HOTSPOTS

The world's largest economy is one of the few global hotspots as Europe seeks to avoid deflation, China slows and falling commodity prices hurt countries such as Brazil and Canada. The International Monetary Fund last week made the steepest cut to its global growth forecast in three years, reducing it to 3.5 per cent in 2015 from 3.8 per cent previously.

"When you look around the globe, it's just very hard to find a lot of big, bright lights on the economic horizon," with the exception of the "amazing" US, Michael Sabia, chief executive officer of the Caisse de Depot et Placement du Quebec, said in Davos.

Sabia's C$215 billion (S$233 billion) fund, which is Canada's second-biggest pension manager, is betting on America with this month's US$2.2 billion acquisition of a Manhattan skyscraper and last year's participation in a consortium that bought Phoenix-based PetSmart Inc. for about US$8.3 billion.

European Malaise Economists at Deutsche Bank AG predict the US will contribute close to 18 percent to global growth in 2015, compared with the 11 percent for all other industrialized countries combined. The IMF forecasts that the American economy will grow 3.6 per cent this year.

The concern in Davos was that the malaise in Europe and parts of Asia may end up undermining that strength.

"I'm a little more worried about the US in the next quarter or so," Larry Fink, chief executive officer of BlackRock Inc., said in a Bloomberg Television interview.

Fink was among those to note the economy is already feeling the downside of its relative good fortune in the form of the rising dollar. The greenback has climbed about 15 percent on a trade-weighted basis in the last year, threatening to pinch exporters and slow already-weak inflation.

Continued gains for the dollar would "have a chilling effect," said Goldman Sachs Group Inc. president Gary Cohn.

FEW OPTIONS

Investors looking for alternative investment opportunities have few other options. After powering the world out of its 2009 recession, China grew in 2014 at the slowest pace in at least 24 years as its leaders try to rebalance the economy towards consumer spending. The euro-area and Japan face deflationary threats, and weak prices for oil and iron ore threaten both emerging markets like Brazil and developed commodity exporters such as Australia.

Evidence of the alarm came last week as the Bank of Canada and European Central Bank both eased monetary policy either unexpectedly or by more than investors predicted. The ECB won praise in Davos for deploying a 1.1 trillion euro quantitative-easing programme.

"We can't have Europe in the situation where they find themselves right now," US Commerce Secretary Penny Pritzker said in Davos. "The US is in a good position and will do well, but look - we're part of a global community."

Lackluster growth globally also may prevent Federal Reserve policy makers from delivering on their plan to raise interest rates this year, many Davos delegates said.

Despite the recent growth and jobs recovery, the Fed's preferred inflation gauge, the personal consumption expenditures price index, has undershot its 2 per cent goal for 31 straight months.

"The Fed should not be fighting against inflation until it sees the whites of its eyes," former US treasury secretary Lawrence Summers said on a Bloomberg panel in Davos. "That is a long way off." European and Japanese central bankers told Bloomberg Television they are willing to take further action if inflation looks likely to keep undershooting their targets. ECB Executive Board member Benoit Coeure said his institution will "have to do more" if it fails to revive inflation, while Bank of Japan governor Haruhiko Kuroda said "we can make adjustment to our monetary policy" if needed.

Mr Kuroda still warned against excessive pessimism, arguing that monetary stimulus and cheap oil should support global growth.

Nonetheless, Blackstone Group LP Chairman Stephen Schwarzman summed up the prevailing mood in Davos.

"The consensus here is worry because if you're not domiciled in the United States there's a lot to worry about," he told Bloomberg Television. "There's more caution in the face of a strong US."

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