U.S. President Donald Trump, left, welcomes Theresa May, U.K. prime minister, while arriving to the West Wing of the White House in Washington, D.C., U.S., on January 27, 2017. (Photographer: Andrew Harrer/Bloomberg)

‘New World’ of Politics Identified in Davos as Key Growth Threat

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Leaders like Donald Trump, Theresa May and Emmanuel Macron may be skipping Davos, but politics is very much on the mind of executives and investors gathered in the Swiss Alps. And they’re not happy.

From the U.S. president’s trade war with China to May’s struggle to get her European Union divorce through as well as the shadow of nationalism on policy making around the world, the political risks for the world economy are mounting.

The problem for executives is that they have to make investment and hiring decisions as governments turn insular and protectionist. The emergence of leaders from outside established parties with a bias to communicating directly with voters on social media also makes it hard to understand policy processes as Trump’s abrupt pronouncement he’d withdraw U.S. troops from Syria showed.

‘New World’ of Politics Identified in Davos as Key Growth Threat

"There’s been a lot of thinking on how business would be disrupted by technology,” Credit Suisse Group AG chief executive officer Tidjane Thiam told Bloomberg Television. “I’m not certain that there has been the same level of thinking on how politics would be disruptive. This is a new world."

Criticizing politicians for impeding expansion marks a reversal of the annual meetings of the World Economic Forum over the last decade, when leaders admonished Wall Street for causing the 2008 financial crisis. On Wednesday, delegates will be addressed by German Chancellor Angela Merkel, Japanese Prime Minister Shinzo Abe, Italian Premier Giuseppe Conte and China’s Vice President Wang Qishan.

Trump’s Upheavals

Since coming to power, Trump has attacked the system of rules that guided the postwar global economy and signaled a retreat by the U.S. from foreign policy, arguing America has gone too far in financing the defense umbrella for many allies and accepting what he calls unfair trade practices. That’s raised questions about the future role of everything from the World Trade Organization to NATO.

The risk from the political climate was evident in the International Monetary Fund’s latest prediction for global growth -- it expects the slowest reading this year since 2016, and warns it could cut its forecasts more deeply if trade tensions mount.

‘New World’ of Politics Identified in Davos as Key Growth Threat

“Even as the world economy continues to move ahead, it is facing significantly higher risks, some of them related to policy,” said IMF Managing Director Christine Lagarde.

Lagarde told a closed-door meeting of executives they must step in more to address issues such as inequality and faltering growth, according to Emma Marcegaglia, chairwoman of Italian oil company Eni SpA, who was present.

"The message is, whether you like it or not, you have to -- we as corporations -- have to take more responsibility on inequality, on environment, on health, on re-skilling people,” Marcegaglia said. “Because almost everywhere in the world governments are showing that they are not able to face these breakthrough challenges.”

U.S. vs China

Top of the list of worries among CEOs was the trade spat between the U.S. and China, which is on hiatus as Beijing and Washington seek common ground before a March deadline for higher tariffs on Chinese goods.

“Part of the uncertainty and instability that we have right now is that what happens between the U.S. and China is so significant to economic growth,” said Carlos Pascual, senior vice president of global energy at IHS Markit. “The fact that so much is at stake but there’s such a limited amount that you can do about it, that’s part of what’s creating so much instability and insecurity.”

U.S. politicians also drew barbs for the longest-ever government shutdown, which has deprived federal workers of pay and threatens the broader economy the longer it runs.

“Clearly I worry about the people in terms of the hardship that it’s created,” said Citigroup Inc. CEO Michael Corbat. “We’re now entering the second pay cycle.”

‘Wishful Thinking’

While the U.S. economy appears in decent shape, including consumer demand and wages, people are worried about everything from job security to tensions with Iran and North Korea, plus the general unpredictability now evident in politics, according to JPMorgan Chase & Co. CEO Jamie Dimon.

"The indirect effect is confidence in investment so you have a bunch of businesses now, saying ’I’m not going to do that yet or make that investment yet’,” Dimon said. "There’s always a lot of winds, but it seems to be more than average."

Meantime, May drew criticism as Britain barrels toward the March 29 exit date from the European Union without a deal in place to handle the adjustment.

‘New World’ of Politics Identified in Davos as Key Growth Threat

“Wishful thinking doesn’t always come true -- and that is the way I would describe the markets at the moment,” BlackRock Vice Chairman Philipp Hildebrand said in an interview. “From a statutory perspective -- formally, legally today -- the default option in March is basically a hard Brexit.”

The euro-area didn’t escape criticism either at a time when Macron faces weekly street protests against his reform program while Italy’s coalition is showing signs of strain and arguing with counterparts in Europe about its budget.

“There’s a restlessness in Europe,” said John Studzinski, vice president of Pacific Investment Management Co. “You got to look at what works and fix what isn’t working."

‘More Tension’

U.S. Secretary of State Michael Pompeo referenced the "new winds" across the world in a speech to Davos that touted U.S. economic strength and claimed foreign policy successes. His calculation was the disruptions taking place in the global political order are a "positive development." Pompeo delivered his speech by video after Trump ordered the U.S. political delegation to also skip the forum.

‘New World’ of Politics Identified in Davos as Key Growth Threat

Even as Pompeo approvingly cited upheaval “in Ohio, Rio de Janeiro and in Rome,” he boasted that “the unleashing of animal spirits has allowed" the U.S. economy to grow "even as the global slowdown looms.”

That’s not a view necessarily embraced by executives this week in the Swiss Alps.

“A year ago at Davos everyone was happy,” said Charles-Edouard Bouee, CEO of Munich-based consultants Roland Berger. “There was a real consensus between government and businesses. There’s a lot more tension this year.”

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