January 2017

Dave McKay on Davos 2017: Slippery Roads Ahead

Dave McKay, President & Chief Executive Officer, Royal Bank of Canada, recently returned from the World Economic Forum in Davos. He shares his views from the forum, including the ten biggest questions for 2017.

The annual World Economic Forum (WEF)— a gathering of 2,500 business, government and civil society leaders — was unlike any other since the gathering was first held in 1971. A year ago, the conference was consumed by volatility — upheaval in financial markets, a major oil slump, economic jitters in China, and a refugee crisis in Europe. This year, concerns ran much deeper, to systemic shifts that may shape the world for a generation rather than a business cycle or two. 

From populism to technology, Davos’s icy streets were filled with a sense that the world is at an inflection point that may be as acute as 1989 and the end of the Cold War. Here are some of the biggest questions for 2017: 

1.    Can American optimism overcome global skepticism?

American CEOs were more confident than I’d seen them in years. Brian Moynihan, who runs Bank of America, captured the spirit well: “The optimism of the business community is palpable. Consumer confidence is up, small business confidence is up.” Financial markets have surged since the election, betting Donald Trump will deliver lower taxes, smarter regulations and infrastructure spending. The election has started to liberate “animal spirits” — the invisible confidence that leads companies to expand and consumers to spend. But what happens if the new administration sparks a trade war with, say, Mexico or China? Or if it blows a hole in the U.S. deficit? Or if Congress blocks proposed tax cuts? Animal spirits can turn to fear as quickly as they take on hope. 

2.    Can Europe save itself from itself?

There’s no greater threat to Europe than Europe. Elections this year in Germany, France and the Netherlands have anti-EU candidates in contention for power. Italy’s financial troubles continue to raise doubts about the Eurozone. And in the EU’s periphery, from eastern to southern Europe, there’s palpable concern about Germany’s use of the low euro to boost its own exports, stripping its poorer neighbours of jobs and investment. But the biggest concern is Britain and the lack of a clear Brexit plan. Downing Street sent its heavy artillery — Prime Minister Theresa May and her predecessor David Cameron, Chancellor of the Exchequer Philip Hammond and his predecessor George Osbourne — to instill confidence. But the audience was skeptical. May says her government wants access to the common market and control over migration. The rest of Europe is unlikely to agree to something that other member states want but don’t have.

3.     Are we seeing China, the new superpower?

Picture this: Outgoing Vice President Joe Biden’s modified Boeing 757 parked at Zurich airport next to Chinese President Xi Jinping’s much bigger 747-400. Davos was Xi’s coming out as a global leader. Not only was it the first time a Chinese president had spoken at WEF; his address was a road map to the decade ahead, from Beijing’s point of view. It was the most important speech of the week, perhaps of the year, as Xi staked a claim to be the leading voice for Davos’s key tenets: globalization and cooperation. He talked about the importance of globalization to middle-class jobs and poverty reduction. He hinted at more deals for Europe, more aid for Africa and more trade for the rest of Asia. And he called for a multilateral approach to global problems. But his most important message was for an audience of one: “No one is a winner in a trade war.” When Xi gets to speak with Trump directly, he might remind the President who made that big airplane.  

4.     Will King Dollar undermine President Trump?

The US dollar, against a basket of currencies, is up 4.5% since Election Day. Against the peso, it’s up 15%. Even before Inauguration Day, American exports were less competitive, and imports were cheaper, injecting Davos was a mood that was both excited and concerned. Trump’s protectionist ideas stand to weaken imports and inflate the dollar, thus making American exports less competitive. The prospect of higher interest rates might push the dollar even higher. The market may self-correct, keeping American growth balanced with global growth, but that adjustment could require more production shifts to Mexico and other lower-cost markets. How will Trump react? If he proposes harsher border measures, it could undermine the very growth he’s promised to Middle America. 

5.     Can Alexa, Siri and friends make us all more productive?

Artificial intelligence was the hottest topic at Davos. There’s not a business, or a country, that isn’t rethinking its competitive place in a new, smart economy where machines do a lot of the thinking. The productivity gains seem obvious. Google, for instance, has used AI to cut the electricity use of its server farms by 40%. Yet for all the hype about potential job losses, the general view among corporate leaders was AI is still years away from disrupting the workforce in a seismic way. In the meantime, we have a chance to overhaul our approach to education to help us all thrive in a technology-rich age. That should mean more work-integrated learning to ensure the classroom and workplace are moving together into this exciting new age – and more lifelong learning to ensure we all stay relevant as the pace of change accelerates.  

6.     Can humans find a greater purpose for artificial intelligence?

Most companies working with AI seem to be using it for efficiency gains. As one Davos-goer said, any task that requires less than 10 seconds of thought should be automated. AI goes beyond automation, of course. It’s about using machines to study habits and recognize patterns. Voice-recognition is a good example, as machines can listen to our voices over and over again to recognize who we are — digital identity — and what we want. Consumers are generally happy getting to simple answers more quickly. That, in turn, allows us all to focus more on the complex needs of our customers. But is AI really improving the human condition? Many business leaders are looking for ways to apply commercial technologies to social concerns. Satya Nadella, the CEO of Microsoft, shared an example from his two home states — Washington in the US, and Andhra Pradesh in India — where machine learning has helped school administrators determine the causes of poor test scores. The more we can apply AI for good, the better we’ll all be.

7.     Is a Basic Income Guarantee the big policy we need to reverse the mood against globalization?

Ironies can abound at Davos, especially when ideas like a basic income guarantee emerge. Here’s the theory: there’s so much uncertainty from globalization and technology that every adult should have a guaranteed share of the benefits. In the U.S., this would require an end to a range of welfare programs with a straight payment of, say, $15,000 a year to every adult. Pilot projects have been carried out in several countries, with no evidence of people working less. In fact, in some places, they work more because they don’t need to game bureaucratic welfare programs. Canada has a form of this already, through Employment Insurance and tax credits for low-income families. It would just be expanded and simplified, enabling people to better pilot the precarious economy. There are plenty of counter-arguments — a redirection of public money from social goods to private consumption may be the most important — but in a precarious age, the idea is at least worth debating.

8.     Is 2017 the end of the fintech revolution, or a new beginning?

There’s been a significant shift in the relationship between financial institutions and fintech disruptors in just one year. According to KPMG, investment in financial technology firms surged last year, growing nearly 50% to $19.1 billion (US). There’s also been a shift from product improvement to platform leverage, as fintech players’ switch from building better digital mousetraps to employing technologies like artificial intelligence and blockchain to transform our relationship with finance. But here’s the biggest change: banks and insurers are partnering with fintech entrepreneurs to take finance to new frontiers. It’s not a coincidence. The fintech players, having attracted a lot of venture capital, now realize they don’t have the scale to make new technologies work to their potential. Meanwhile, banks have emerged stronger from the post-crisis years — better capitalized, better managed — with a new willingness to experiment and innovate. For both sides, Davos had a simple message: those who focus on customer needs, rather than techno-hype, will win.

9.     Should cybersecurity bet more on AI or human trust?

Everyone at Davos seemed to have a hacking story. Politicians who had seen their files attacked. Companies besieged by phishing expeditions. Military planners turning their minds to virtual battlefields. Cybersecurity may be the decade’s greatest business challenge. We’ve seen plenty of evidence — Target, Yahoo, Sony — for every company to make it a strategic priority. But as the hackers get better, companies will need to find new ways to work together, and work with friendly governments, to protect their databases and their customers. We’re likely to see artificial intelligence play a greater role, too, as robots learn to hack robots. Business, government and security agencies will need to work more closely than ever to build defenses. AI will be critical. Human trust, even more so.

10.     Can CEOs be more responsive?

Across the West, trust in public institutions is touching new lows. Governments continue to be rejected by the people they represent. And media are taking it a lot harder than they give. But the real change is us. According to the annual Edelman Trust Barometer, which was released at Davos, we’re four times as likely to ignore information that doesn’t fit with our opinion. And when it comes to credibility, we’re now most likely to believe “people like us.” In this age of filter bubbles, echo chambers and false news, business will have to help ensure our communities stay more open than closed. Traditional corporate social responsibility won’t cut it. With all that’s coming at us, companies now need to see the fullness of their employees and customers, to act with a clear purpose, and to support the work they’re doing to help communities navigate these highly uncertain times.