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While many of the attendees of the World Economic Forum at Davos were busy celebrating a brighter economic future on the horizon (and getting wasted at glamorous McKinsey parties), a small but vocal group delivered a more somber verdict: the world economy isn't nearly as well-off as the optimistic Davos consensus seems to suggest. For consultants at firms not named McKinsey, it's a solemn prospect indeed.
"The fundamentals haven’t been addressed at all," warns Barrie Wilkinson, senior partner at Oliver Wyman's London office and author of the report The Financial Crisis of 2015: An Avoidable History. "The things that caused the previous crisis—loose monetary policy and trade imbalances—they’re actually bigger now than they were then." Wilkinson's warnings come in stark contrast to the "very positive mood" on display by many chief executives and government leaders at this year's summit. From David Cameron to Dmitri Medvedev and even to Jim Flaherty, Canadian finance minister, optimism ran high that the world had learned the lessons of the recent economic crisis. "The systemic reforms that have been accomplished are significant," Flaherty asserted. "We need to communicate better that financial institutions globally are operating on a very different basis today, that they are operating with higher capital and are better regulated." Consultants from McKinsey, selected to help write this year's World Economic Forum annual report, suggested that the fundamentals of the global economy were so good that it could support a $100 trillion credit expansion (double today's figure) "without increasing the risk of a major crisis."
Wilkinson, for one, couldn't disagree more. He argues that the financial mechanisms that govern much of the world economy need to be fundamentally improved; recent measures for reform, he says, are cosmetic in nature and thereby incapable of deterring a repeat crisis in the years ahead. Such a crisis, the Oliver Wyman man suggests, would be too much for the global economy to handle. "If there is another banking crisis, the Western governments are just in no shape to stabilize the system, they’ve expended their entire arsenal on the last round of fiscal injections," Wilkinson said. Other consultants expressed similar pessimism or, at least, cautious optimism. "The good news is in the U.S. we’re seeing renewed growth," said Joe Saddi, chairman at Booz & Co. "But there is still an unemployment situation and it remains to be seen if there is a credible strategy for dealing with the deficit." Add these concerns those of Bain chairman Orit Gadiesh (gov't vs. business, world water shortages, demographic trends) Ernst & Young CEO Jim Turley (demographic changes, economic trends), and Roland Berger CEO Dr. Martin Wittig (wayward business strategies) and you're looking at a bona fide opposition voice.
So who to believe? Are consultants just a bunch of nay-saying perma-bears, or are they more likely to cast an objective eye at the forces shaping today's global business dynamics? On the other hand, are politicians like French Finance Minister Christine Lagarde ("we learned from our mistakes and we learned from the crisis") speaking with economic data or poll data in mind?
One thing is for certain: we're about to find out.
For more information:
Bloomberg: Lonely Analyst Warns of 2015 Bank Crisis Amid 'Upbeat' Davos
Business Insider: World Economic Forum Says We Need $100 Trillion More Credit
Bloomberg: Geithner Says U.S. Economic Recovery Still Too Weak to Reduce Unemployment
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