Economic Prospects Brightened by ECB Package, Falling Oil Prices, Structural Reforms

Davos-Klosters, Switzerland, 24 January 2015 – Despite more pessimism at the World Economic Forum this year than last, central bankers and economic leaders were more upbeat about economic prospects for the year ahead. With the International Monetary Fund (IMF) forecasting 3.5% growth this year, panellists at a session on the global economic outlook pointed to the upside potential of the European Central Bank stimulus package, falling oil prices, structural change in Brazil, China and Japan, and robust growth in the United States.

The ECB decision on quantitative easing (QE) lays the ground for stimulus in the Eurozone but the challenge now is for governments to move ahead with structural reforms. “We have done our part, but the ECB cannot raise productivity, increase employment or encourage investment. That requires a more comprehensive set of reforms,” said Benoît Coeuré, Member of the Executive Board, European Central Bank, Frankfurt. Explaining the ECB’s intervention, he said: “We could not sit by and watch the political foundations of the European project being undermined.”

Other panellists welcomed the ECB package while underlining the need to back up this monetary manoeuvre with structural reforms, including labour market reform and fiscal stimulus to increase aggregate demand. “QE creates the space for the structural reforms and investment,” said Min Zhu, Deputy Managing Director, International Monetary Fund (IMF), Washington DC.

The decline in the oil price is a boost to growth in most economies and will ease the transition to structural reform. This is the case in Brazil despite its growing oil production. Joaquim Levy, Minister of Finance of Brazil, said the country is shifting from increasing incomes of its poorest citizens, which was the focus of its economic policies for the past decade, to building investment, both by companies and the government. “Our goal is to make Brazil a nimbler, more agile market, where it is easier to do business,” he said.

Japan is also well into implementation of a programme that includes aggressive monetary easing, gradual fiscal consolidation, and structural reform that are intended to lay the foundations for 2% growth this year. Haruhiko Kuroda, Governor of the Bank of Japan, is upbeat not only about Japan’s growth prospects but also about China. “China is making huge structural reforms while continuing to grow at 7.5%,” he said.

US economic performance is strong and provides a significant boost to global demand. But Zhu warned that much of the growth is coming from consumers and government spending, with private investment still relatively low. Meanwhile, he called on policy-makers to put the poorest countries, which have been battered by economic headwinds, at the top of the policy agenda.

Technology will play a huge and unpredictable role not only in the real economy but also in the financial sector through payments and trading systems. The potential is huge, said Mark J. Carney, Governor of the Bank of England, but prudence is necessary. “We don’t want to find ourselves in an Uber situation in the financial markets,” he added.

More than 2,500 participants are taking part at the 45th World Economic Forum Annual Meeting in Davos-Klosters, Switzerland from 21 to 24 January 2015.