What we learned at Davos: signs of hope emerge from the pessimism

Larry Elliott 

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The world has become hard-wired for pessimism, and there was plenty of it on display in Davos last week.

Much has changed in the 52 years since the World Economic Forum was first held in the Swiss ski resort. At that original WEF summit the global economy was dominated by the rich nations of Europe and northern America, currencies were fixed under the Bretton Woods system, and oil was $2 a barrel.

The cold war between the US and the Soviet Union was still raging. It was a pre-digital age; personal computers and smartphones were things of the future. Artificial intelligence (AI) was the stuff of science fiction.

But the thing that has really changed is that a sense of things getting better has been replaced in the developed world by a feeling that things are getting worse.

The vision of the future is dystopian, one in which people get poorer not richer, robots steal all the jobs, and an addiction to fossil fuels leads to the extinction of the planet.

António Guterres, the UN secretary-general, made it clear he thought the battle against climate change was being lost; Volodymyr Zelenskiy’s call for Ukraine to be supplied with German-made heavy tanks was a reminder that a war has been fought in Europe for nigh-on a year.

Fears were raised about a new debt crisis affecting scores of the world’s poorest countries. A global pandemic and the return of double-digit inflation have deepened the sense of foreboding.

Given all that, it was surprising to find the mood in Davos as upbeat as it was. In part, that’s because few – if any – of the WEF community are at the sharp end of the cost of living crisis, but there was a bit more to it than that.

After surviving the horrors of the past three years there was a sense that there can’t be much more bad stuff out there and that, as a result, the only way is up from here. This may seem panglossian but it is also entirely understandable. Around the world, and not just in Davos, there is a yearning for some good news.

And there is some. Inflation rates in the US, the eurozone and the UK appear to have peaked. Central banks may, therefore, be able to limit the extent of future increases in interest rates. China has rebounded more quickly than expected after abandoning its zero-tolerance approach to Covid.

To be sure, it is possible to put a negative spin on this too. If demand in China picks up, that may drive up the price of oil and gas, so slowing – or even reversing – the fall in inflation in the west. In that event, the Federal Reserve, European Central Bank and Bank of England will keep interest rates higher for longer, thus increasing the risks of recession.

Even so, the International Monetary Fund looks likely to revise up its estimate of 2023 global growth when it releases updated forecasts at the end of the month.

The improvement in the outlook will not be spectacular, but Kristalina Georgieva, the IMF’s managing director, is relieved that prospects look less dire than they did a few months. Less bad doesn’t mean good, Georgieva told the WEF closing session, but at least things are not getting worse.

The other source of optimism in Davos stemmed from a conviction that technological progress – in artificial intelligence (AI), especially – has not just accelerated massively in the past couple of years but will continue to speed up.

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Those in the tech sector deploying it in advance military hardware had their own reason for being cheerful: the Ukraine war has provided a shop window to showcase their wares.

Others in Davos saw the potential for AI to play a crucial part in the fight against global heating. A paper for the WEF by Nicholas Stern and Mattia Romani made the case that the world has in its grasp “a new growth and development story driven by investment and innovation in green technology, boosted by AI”.

Lord Stern is an expert in the economics of climate change, and the paper acted as a counterbalance to Guterres’s pessimism. It makes the case that in the next five years – a crucial period if net zero targets are to be achieved – more than half the tipping points for key green technologies will have been met.

Romani and Stern say the cost of energy generation for solar and wind power, including short-term battery storage, will fall below that of new coal and gas in the US in 2023, with other countries not far behind.

Unsubsidised battery electric vehicles are expected to achieve cost parity with internal combustion engine vehicles in all light vehicle segments of the market by 2025-26. The same thing is happening with green fertiliser, they say.

AI, the paper adds, is becoming a general-purpose technology, the equivalent of electricity or IT, and looks likely to bring a long period of low growth and weak productivity to an end.

AI is already being used in crop analysis and in improving climate disaster alert systems. It will make it easier to decarbonise by accelerating “tipping points and the deployment of breakthrough technologies across economic sectors – such as fusion and solar, quantum chemistry, alternative protein design and many others”.

The transformation doesn’t come cheap; an estimated $5-7tn (£4-5.6tn) of investment a year will be needed until 2030. But if a bit of optimism is what you are after, Stern and Romani provide it. They say the green transition represents the biggest investment opportunity since the Industrial Revolution. And they are right.