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31 Jan, 2009 07:41

Davos forum speakers look for key to economic revival

As the economic news from around the world became bleaker this week, economists and experts mulled solutions at the world economic forum in Davos.

A monster from the past – the liquidity trap – is back, for the first time since the Depression of the 1930s. With lenders keeping their cash holdings rather than investing, the world economy is grinding to a halt, according to Andrei Bougrov, Managing Director, at Interros.

“Basically everyone is trying to flush the problem with liquidity as far as the banking sector is concerned. But this is not enough because the banks are not lending. Not many people have been around at the time of the Great Depression so we're no experts on that – we're all students here.”

On Thursday, Federal Reserve officials warned of a prolonged global slowdown which could push the US to the brink of deflation. That warning followed a forecast on Wednesday by the IMF that the world economy would slow to a near standstill this year.

Ngozi Okonjo-Iweala, Managing Director of The World Bank says rebuilding confidence is key to restoring capital flows.

“If you put in place these 2 measures that I talked about, which is one doing the cleaning of the financial system and two, continuing with the fiscal stimulus in these counties and trying to create jobs, confidence will start to come back. Banks will begin to lend again and that is oil that greases the wheel.”

But stimulating the financial sector is not a total solution. Jacko Maree, CEO Standard Group believes the world may have to look to emerging nations as the driving force that stimulates demand.

“The kick start is going to come from the emerging markets and the recovery in those rather than from the developed world. When we look at countries like Brazil and even Russia – there's been a tremendous change in values of stock prices but many of the underlying companies are doing well – so there's almost seems to be an overreaction.”

Sharp interest rate cuts and fiscal stimulus packages have been the standard medicine dished out so far around the world, but whether it will work is as yet unclear. The consensus is that the world has to brace itself for a best case scenario of at least one year of recession, and a subsequent decade of low growth. Just how to get things back on track is harder to agree on.