World Economic Forum opens in Davos

DAVOS, Switzerland - The outlook for the global economy this year is decidedly dour, but leading economists at the World Economic Forum in Switzerland had mixed views Wednesday about the possibility of a global recession.

"If there is a tremendous slowdown in the U.S. economy, then we must be worried about it," said Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

He said China's growth could help it weather any slowdown as that nation boosts trade with countries outside the United States.

The potential for a global slowdown triggered by a U.S. recession was a top issue among economists from Asia, the United States and government ministers from India and China.

Stephen Roach, chairman of investment bank Morgan Stanley in Asia, said there would be global ramifications should the world's largest economy falter.

Asked by a Mexican businessman if his country could sidestep a U.S. recession, Roach was blunt.

"My good friend from Mexico, you're in trouble," Roach said. "Mexican exports to the U.S. account for 25 percent of your GDP. Same number for Canada. How can the U.S. go into recession and Mexico be fine?"

Nouriel Roubini, chairman of New York-based Roubini Global Economics, cited the maxim that if the U.S. economy sneezes, the rest of the world catches a cold, but said this time the diagnosis for the U.S. was worse.

"In this case the U.S. is going to have a protracted case of pneumonia," he said.

The impact of the sluggish U.S. economy, and what it may portend for other nations, hung over talks even after the U.S. Federal Reserve Bank cut its benchmark refinancing rate to 3.5 percent from 4.25 percent Tuesday to counter a global market slide.

"The United States economy will correct itself," said David O'Reilly, chairman and CEO of Chevron Corp. "I'm an optimist when it comes to the length of what may be a slowdown or a mild recession. ... the outlook is still pretty good."

Economists also split over the role of central banks and whether institutions like the Fed were equipped to steer the global economy out of danger.

John Snow, the former U.S. Treasury secretary, said central banks have performed remarkably over the last two decades — better than any time in history, perhaps — and continue to make the necessary adjustments.

"The issue of whether central banks are capable of vigorous action, bold action, was answered yesterday," Snow said, referring to the Fed's interest rate cuts. "They can't see the world ahead perfectly, but who can?"

Joseph Stiglitz, the 2001 Nobel Prize winner for economics and a critic of free market champions, and billionaire philanthropist George Soros, disagreed.

"What we have now are the foreseeable consequences of bad economic management," Stiglitz said.

Lawrence Summers, former Harvard University president and Treasury secretary under U.S. President Bill Clinton, said central banks have lost their way.

"I think it's hard to give central banks a very high grade over the last couple of years on recognition of ... bubbles and the ability to address them," he said. "I think it's hard to give a high grade over the last 6 months when the bubbles have been bursting and (the banks) have been behind the grade."

Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, said the Fed must send stronger and clearer messages to financial markets to ward off a steep slowdown.

"Alan Greenspan became famous because nobody could understand a word that he said," Gurria said. "You can't run a financial system like that."

Others wondered why the European Central Bank, which has kept its benchmark rate unchanged at 4 percent since last summer, had not acted in accordance with central banks in the U.S. and Britain.

"Europe is not going to get special dispensation from a global economic slowdown," Roach said.

The forum, now in its 38th year, will also touch on the effects of terrorism, a workable peace process in the Middle East and how technology is ushering in a new age of global social networking.

U.S. Secretary of State Condoleezza Rice and Afghan President Hamid Karzai were scheduled to address the opening reception later Wednesday.

Rice is also expected to meet with Pakistan President Pervez Musharraf and Karzai in closed-door sessions.

Her meeting with Musharraf will be the first since the assassination in December of opposition leader Benazir Bhutto, which pushed the nuclear-armed Pakistan into near chaos.

In a nod to concern about climate change, Rajendra K. Pachauri, chairman of the U.N.'s Intergovernmental Panel on Climate Change is to speak. Al Gore, who shared the 2007 Nobel Peace Prize with the panel, is also participating in the five-day meeting.

A year ago, Davos attendees foresaw a strong economy. The credit crisis brought on by massive exposure to subprime mortgage securities has changed that.

"It's not about a soft landing or a hard landing," Roubini said, but "rather how hard a landing it will be."

"We're seeing a financial system that is under severe stress," he said. "The Fed cannot prevent this recession from occurring."

The meeting itself will feature participants from 88 countries, including British Prime Minister Gordon Brown and Microsoft Corp. co-founder and chairman Bill Gates.