Tuesday, May 22, 2018

Downhill at Davos

It’s that time of year again. The planet’s most powerful figures from business, finance and politics met at Davos in Switzerland for the World Economic Forum’s annual schmoozefest.

Needless to say, the insurance industry was also there in force. Among many others, Bruce Carnegie-Brown and Inga Beale, the chairman and chief executive of Lloyd’s, were both in town, as were Tom de Swaan and Mario Greco, the chairman and chief executive of Zurich, which was handing out blue woolly hats that were clearly appreciated in a week when the ski resort was buried under a couple of metres of snow.

Dan Glaser, chief executive of Marsh & McLennan, was also there, promoting the Global Risks Report that is released each year at Davos in partnership with the WEF and Zurich. Unusually, one of the biggest risks cited in the report was also an attendee: Donald Trump, who is mentioned in relation to geopolitical risks, climate change and nationalism.

And that’s not the only reason the US president cuts an unlikely figure at Davos. During his presidential campaign, Trump toured the country with a populist “America First” message that was anti-globalism and anti-elite. One could therefore be forgiven for thinking that he would be unwelcome at a meeting of the global elite.

But, in a television interview on CNBC, Glaser was suitably diplomatic about Trump’s appearance, the first for a US president since Bill Clinton. “As an American, I’m happy the president is coming,” he said. “I absolutely believe people here are interested in what he has to say.”

Of course, as an American CEO, Glaser has good reason to be happy with the president — he recently gave US corporations a big tax cut, which Glaser said were “incredibly welcome” and would allow the company to compete on a level playing field with “foreign competitors” (referring, presumably, to the Irish-domiciled Willis Towers Watson).

Glaser wouldn’t say how much Trump’s US$1 trillion fiscal stimulus would save Marsh & McLennan, but he was clearly pleased with the outcome.

CEOs might be happy with it, but the irony of the tax cut is that it comes at a time when US economic growth is healthy, unemployment is low, corporate profits are high and the economic environment elsewhere in the world is similarly benign. And this message is reflected in the Global Risks Report, as Glaser admitted on CNBC.

“If you look at the issues from four or five years ago, they were all economic — unemployment, income disparity, fiscal crises — and now, it’s things like extreme weather events, natural disasters, climate change, cybersecurity,” he said. “The tax cuts are not the fuel behind the optimism.”

Indeed, while Trump and his administration have spent massive political capital to provide an unnecessary tax cut, they are also on the wrong side of the issues that most worry executives surveyed in the report.

Environmental risks overwhelmingly dominate the minds of the world’s business leaders, according to the survey, but the US government under Trump is cutting funding across the board to mitigate such risks.

Meanwhile, weapons of mass destruction are the biggest concern in terms of potential impact, for the second year in a row, yet such fears could probably be reduced substantially if the president simply stopped using Twitter.

However, the survey respondents’ lack of concern about the economy could also be seen as a red flag. To be sure, some analysts fear that the eight-year bull run could soon come to an end — and the WEF itself also sounds a note of caution on the economic outlook. But by cutting taxes at this point in the cycle, with interest rates still relatively low, the US has left itself with very little policy room to react effectively to a slowdown.

It is also worth noting that an asset price collapse was ranked as only the fifth most likely risk in the 2007 Global Risks Report, while “breakdown of critical information infrastructure” was number one (who can remember what that was about?).

For only the second time since 2007, there are no economic risks at all in the top five most likely risks this year, which is probably a good indicator that we should be more worried about the economy.

While executives’ concerns are certainly reasonable in the long term, the risk of a worsening economic environment is likely to rise during 2018.

It remains to be seen if Trump will be as willing to take credit for that as he has been for the level of the Dow.

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