UBS at Davos: ‘Maybe the world’s not so austere’

According to a white paper released by UBS for this week’s World Economic Forum in Davos, one of the surprising factors ‘reshaping the world’ – the Davos theme this year – is an aggregate absence of austerity among governments globally.

Viewing the global economy as a single unit, the authors see a very different picture to the post-crisis world of austerity. Indeed, the two largest components of global GDP, namely private consumption and fixed investment, both hit multi-year peaks in the first quarter of 2008. The ensuing recession was arguably made less severe by the ongoing rise in government consumption.

Big government has turned out pretty good.

Since the start of 2008, government consumption at the global level has risen by 20 per cent in real terms, whereas private consumption and fixed investment have risen just 8 per cent and 5 per cent respectively. Despite talk of austerity, government spending continues to run ahead of spending in the private sector.

One of the authors of the white paper, Andreas Koester, head of asset allocation and FX at UBS Global Asset Management, will be joining FT Alphaville at 11am on Thursday for a session of Markets Live.

Koester’s bullet points:

• Government consumption’s share of global GDP has risen from 11 per cent to 14 per cent over the past 15 years. In 2013, it hit its highest level since 1980.
• At the same time, government debt-to-GDP ratios have hit record highs in many countries.
• Working-age populations are growing more slowly, or in some countries, such as Japan, beginning to decline.
• Accordingly, the window of opportunity for mature economies to bring government debt levels down to sustainable levels is narrowing, owing to demographic shifts.
• Given the situation in the government sector, private consumption needs to make a bigger contribution to the next phase of the recovery. Its share of GDP continues to hit multi-decade lows. Fixed investment is also making a smaller contribution to global growth than it did in the pre-crisis years.

So join Andreas and the Markets Live team at 11am today.

Here’s the full white paper. Click the image: