4 Economic Issues Discussed in Davos

While most of us were busy watching the Australian Open Finals over the weekend, a good number of world economic hotshots gathered in Davos to discuss the fate of the global economy. Among those in the panel are IMF Managing Director Christine Lagarde, BOE Governor Mark Carney, ECB Governor Mario Draghi, BOJ Governor Haruhiko Kuroda, and Germany’s Minister of Finance Wolfgang Schäuble. Here are the main issues that they talked about:

1. On monetary stimulus

One of the biggest topics that came up during the summit is the Fed’s recent decision to taper asset purchases. According to IMF head Lagarde, there are risks that could stem from the pace of stimulus reduction and how the process is communicated to the markets.

Aside from that, economic gurus agreed that the taper will reduce the amount of liquidity flowing into emerging nations. “We expect this year to be a volatile year for emerging markets as the Fed tapers,” Mexican Finance Minister Luis Videgaray said.

2. On deflation

The topic of deflation also came up, as Lagarde highlighted the below-target inflation in the euro zone. To this, ECB Governor Draghi responded that the central bank is ready to ease monetary policy if necessary. In particular, he pointed out that the ECB is willing to keep interest rates low for an extended period of time.

When asked whether the ECB is considering aggressive easing policies similar to that of the BOJ or the Fed, Draghi answered “I’m not saying it should be done or it shouldn’t be done.”

3. On forward guidance

Forward guidance, which is a communication strategy introduced by several central bank heads nearly a year ago, also came under the spotlight during the World Economic Forum in Davos. In particular, BOE Governor Carney pointed out the need to revise the U.K. central bank’s forward guidance strategy as soon as possible.

Recall that the U.K. recently reported a 7.1% jobless rate, which is just a notch away from the 7% target that the central bank set. In their forward guidance strategy, the BOE stated that they would consider hiking rates as soon as the jobless rate hits the target, but Carney emphasized that hitting this threshold won’t automatically translate to an actual rate hike.

4. On global growth

Of course, the topic of global economic growth came up, as economic gurus tried to assess how the world economy will fare in the near term. Based on their remarks, it appears that economic leaders are expecting the recovery to keep up in the U.S. and in Japan but are predicting weaknesses in the emerging nations.

With that, it’s no surprise that the conclusion of the Davos World Economic Forum sparked risk-off moves in the currency markets. In particular, higher-yielding currencies such as the Aussie and Kiwi underwent declines while the British pound suffered a selloff after Carney cautioned against hiking rates too soon. Meanwhile, the U.S. dollar and Japanese yen enjoyed a bit of support when leaders affirmed the ongoing recovery in the U.S. and Japan. Do you think this is indicative of longer-term trends for these currencies?