Experts See Another Global Dip Ahead

Davos Attendees Pin Hopes on Emerging Economies, Saying Debt and Deficits Will Trouble U.S.; Sparring Over Bank Rules

DAVOS—The global economic recovery could lose pace later this year, dashing hopes for a rapid escape from the deepest downturn of the postwar era, economists and investors said at the World Economic Forum's annual meeting at this Swiss ski resort.

Heavy debts will weigh on governments and households in the U.S. and Europe for some time, while hopes for global growth will continue to rest on fast-developing countries such as India and China, predicted participants at the meeting's opening debate on the economy.

As many expected, the debate on regulating big banks also stoked passions. The push for more stringent regulation has accelerated in Europe and around the world since last week, when U.S. President Barack Obama's administration proposed a plan to tax and curb activities of big banks.

The annual gathering of much of the world financial elite in Davos offers a chance to gauge the mood of business, regulators and analysts about the year ahead. Wednesday's debate suggested that while the global economy is growing again, it isn't out of the woods yet.

The world faces a long, slow recovery "ending in subpar growth," with the risk of a renewed recession along the way, said Nouriel Roubini, an economics professor at New York University who accurately predicted the financial crisis in Davos three years ago.

Mr. Roubini was uncharacteristically optimistic about the growth prospects for the world's emerging economies. But even there he found nits to pick in the form of China's risk of bubbles, Russia's aging population and political obstacles to structural overhauls in Brazil and India.

Turning to bank regulation, Mr. Roubini was among those who argued for even more stringent measures that would separate commercial banking from investment banking.

Financier George Soros said he backed Mr. Obama's plan to curb the activities of big banks, though he said it was both insufficiently broad and "premature," coming before banks had the chance to earn themselves out of their problems.

"This development came too soon because the banks are not out of the woods," said Mr. Soros, chairman of Soros Fund Management LLC and founder of The Open Society Institute.

He said he largely backs the administration's plan. "I'm very supportive of it but I don't think it goes far enough," said Mr. Soros, predicting the plan to stop commercial banks from speculating for their own accounts would lead big banks to split up and spin off investment arms, which themselves would become "too big to fail."

Others warned that the new regulations against banks—and growing protectionism—pose a serious risk to continued recovery. "We have moved from a period of great economic uncertainty to a period of great political uncertainty," said Raghuram Rajan, finance professor at the University of Chicago.

Mr. Rajan said the combination of 10% unemployment in the U.S. and 10% economic growth in China could prove politically toxic, as U.S. politicians might resort to "populism" and protectionist measures.

The disparity of the outlook between emerging and developed economies is particularly stark, he noted.

"Emerging markets used to be associated with indebted governments, lax monetary policy, suspicion of markets, a polarized electorate and a suspect private sector," Mr. Rajan said. Now, he said, that description better fits the world's advanced economies.

Many leading economists and investors showed little confidence that good times are back. The U.S. and Europe will have "U-shaped" or "W-shaped" recoveries, economists on the panel argued, meaning they believe the upturn since late 2009 will fizzle out later this year.

At Davos in 2007, few believed Mr. Roubini when he predicted a deep recession and financial crisis from the bursting of mortgage and credit bubbles.

Three years later, he is calling for more regulation. "I think the proposals are going in the right direction. But they are not enough," he said.

Mr. Roubini advocated the return of the Glass-Steagal Act of 1932, which separated commercial banking from investment banking after the collapse of many U.S. commercial banks in the 1930s.

Others countered that a push for more regulation could impose new risks.

Overreaction to the banking crisis by regulators and politicians could become a significant drag on economic growth, said David Rubenstein, co-founder of private-Wequity firm Carlyle Group. The idea that tougher regulation can avoid all future financial crises is an illusion, he said: "We're not going to eliminate asset bubbles."

The U.S. needs to improve the state of "three d's: debt, the deficit and the dollar," said Mr. Rubenstein, adding that the U.S. budget deficit is bigger than other countries' budgets.