Insights from the floor at Davos 2014

The geopolitical outlook: Bright spots amid worries

While the theme of this year’s annual meeting was broad―"The Reshaping of the World: Consequences for Society, Politics and Business"―the outlook for the global economy was top of mind for Forum participants.

Many participants perceived the US recovery as the most promising, according to Bain partners at Davos. With the congressional budget stalemate largely put to rest, optimism about an American resurgence was vocal, they reported, despite the largely jobless nature of the recovery.

Japanese Prime Minister Shinzō Abe also offered a positive view of his nation’s fortunes, telling participants that the "three arrows" of his economic program was helping his country go from "the land of the setting sun" to a "new dawn." The plan includes a large fiscal stimulus, easing by the Bank of Japan and ongoing efforts to reduce cumbersome government strictures. Most on hand agreed that the first two efforts were already taking hold.

By contrast, the European Union forecast looked grim to many participants. Unlike the US, EU nations are emerging from the global recession with more household, corporate and country debt than they started with, said Orit Gadiesh, chairman of Bain & Company. France Chairman Olivier Marchal highlighted some sobering statistics he heard during a session featuring UK Deputy Prime Minister Nick Clegg and Irish Prime Minister Enda Kenny: Europe represents 7% of the world’s population, 25% of global GDP and 50% of global welfare cost.

Developing nation representatives at the Forum frequently voiced the theme that globalization continues to power the emerging world. But Bain partners at Davos also heard predictions of a slowdown in emerging-market growth as international trade declines. Both the US and the euro zone are importing fewer goods and services, especially oil and gas in the US. Other commodity prices have also declined or not regained their momentum. In private meetings, executives from several major companies, including some from the technology and consumer products sectors, said that their falling earnings were a leading indicator of this growth slowdown in emerging markets. At the same time, global liquidity is tightening just as China’s massive economy begins to decelerate.

Executives also discussed how reducing non-tariff trade barriers could bolster the worldwide economy, with partner Mark Gottfredson reiterating the findings from a report by the Forum and Bain that indicated that eliminating such barriers could add US$2.6 trillion to global GDP.

Geopolitical risks also weighed on the minds of Forum participants. Japan’s Abe discussed the mounting tension between China and Japan about the islands in the South China and East China seas, comparing the situation to the mood in Europe before World War I. In the Middle East, Iran President Hassan Rouhani made it clear that, while he desired a new relationship with the West based on trust, his nation did not plan to abandon any of its nuclear projects. Companies operating in these regions need to consider how these risks affect their operations and supply chains.

Financial services

The financial services industry carried much less of a public voice than last year, when many bank leaders spoke at sessions. Yet much private talk at the Forum was on the extent of the sector's reform since the 2007 banking crisis. Many participants debated the efficacy of banking reforms, and whether more are needed. These concerns are especially salient as Federal Reserve officials hint at plans to taper the central bank’s quantitative easing program.

Henrik Naujoks, head of Bain's Financial Services practice in Europe, the Middle East and Africa (EMEA), noted that the European Central Bank has developed a workable strategy for "muddling through." But while the system is more stable―and trust has improved among banks―two problems persist: "Banks’ reputation with consumers and the public remains low." Moreover, "banks are realizing that sustaining profits in an environment of increased regulation, changing technology and long-term low interest rates is very tough."

Technology and innovation

In the wake of America’s National Security Agency scandal, the Internet and technology were constant themes at Davos this year. Participants discussed the benefits and risks of social media, the challenges of educating coming generations for tomorrow's jobs and technology’s impact on asset bubbles.

"We really are living in a hyperconnected reality, which―while it can be disruptive―can also be incredibly productive," said Yahoo CEO Marissa Mayer, who co-chaired the three-day summit’s wrap-up session.

Orit, a perennial Davos participant, framed the debate this way while speaking on a panel titled "The Big Brother problem": "In the digital age, we are experiencing too much trust and not enough transparency. That is a frail proposition for users and companies." Orit advised that "trust is not only essential for conducting business on the Internet; it is also a strategic asset for a company." She suggested that companies consider creating privacy boards, conducting annual privacy audits or setting industry standards to protect users.

Google Chairman Eric Schmidt warned of even larger consequences, saying that due to technology’s constant development, more and more middle class workers would lose their jobs. Schmidt called this the "defining problem" for the next two to three decades, adding that it will be like the Industrial Revolution in its wide-scale effect. "It's a race between computers and people—and people need to win," he said.

Tamara Olsen, a partner and Bain's sixth Young Global Leader, described a growing appetite among the next generation of business chiefs for digital innovations to help improve education and healthcare's access and quality. Many new ideas will come from young social entrepreneurs rather than large corporations, she said.

Healthy living

The annual meeting displayed a new emphasis on healthy lifestyles and wellness with more than 25 sessions on the topic. Non-communicable diseases and mental health problems such as dementia are becoming major threats to not only the stability of the world’s health and financial systems, but to workforce productivity and to the economic development of emerging economies, said Norbert Hueltenschmidt, head of Bain’s EMEA Healthcare practice.

"People are becoming increasingly aware of the huge economic burden caused by illness," Norbert said. "For the first time, health and healthy living are on the top of the Davos agenda—and the theme runs throughout the entire program."

One session entitled "Health is wealth" ended with participants pledging to "use health investment as a means to achieve long-term economic growth."

Income inequality

Though billed as a major topic for the event, the issue of income inequality was largely absent from public discussions. The two most notable statements on the growing divide between the wealthy and poor in advanced nations came from Pope Francis and former Israeli President Shimon Peres. In the first papal address at Davos, delivered by an emissary, his message was clear: "The growth of inequality demands something more than economic growth … It also calls for decisions, mechanisms and processes directed to a better distribution of wealth, the creation of sources of employment and an integral promotion of the poor, which goes beyond a simple welfare mentality."

But perhaps the last word came from Peres, who said the future of humanity and improved income distribution came down to science. Rather than focus on the distribution of dollars, global leaders should focus on access to knowledge and technology, he said.

"Science enables us to make three drops of water from one drop," Peres said in his address.