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US tapering a ‘known unknown,’ warns WEF head

Reporter: Hadley Gamble. Writer: Kiran Moodley
Monday, 20 Jan 2014 | 10:51 AM ET
There are many 'known unknowns': WEF's Schwab
Monday, 20 Jan 2014 | 11:20 AM ET
Klaus Schwab, founder and executive chairman of the World Economic Forum, says that the economy might not be able to grow as the pace it did before the crisis, and that this has "enormous consequences."

The reduction of the U.S.'s massive stimulus program is a "known unknown" in 2014, and could disrupt the return of global economic optimism, the head of the World Economic Forum (WEF) told CNBC.

Klaus Schwab, WEF's founder and executive chairman, said the "tapering" of the U.S. Federal Reserve's asset purchases would clearly have an effect -- but that the end result remained to be seen. In December, the Fed announced that it would start to cut back its bond-buying program to $75 billion a month in January -- a reduction of $10 billion.

"It is clear that there is a return of optimism - just look at the stock exchanges. We see entrepreneurial dynamism particularly in the U.S.," he said.

(Read more: Global employment prospects bleak until 2018: ILO)

But Schwab added: "I would say we are cautious, we are in a period of reduced expectations; the economy will not grow as fast as it did before the crash and that has enormous consequences…. We have so many known unknowns such as bank stress tests and tapering and I could go on and on."

He warned that the winding down of stimulus measures could have "quite an effect" on the stock markets, exchange rates and global competitiveness.

Many of the world's most influential business leaders, politicians and economists descend on the Swiss Alpine resort of Davos on Wednesday for the WEF annual meeting, which was founded in 1971. Both the President of Iran, Hasan Rouhani, and Israeli Prime Minister Benjamin Netanyahu are in attendance this year.

(Read more: The Chinese are coming – to Davos)

Also taking place this week in Geneva are talks regarding a peaceful conclusion to the Syrian civil war, and Schwab stressed that the conflict would play a role at Davos.

"In order to complement what's going on in Geneva, we have also sessions devoted to Syria but mainly looking at issues like refugees… the more humanitarian side of the conflict," Schwab said.

"I also feel that at the end of the week that we will know whether Geneva is a success, what I hope very much, or whether we can to an extent pick up the pieces."

France would be a crucial nation to watch in 2014 as Europe's recovery begins to take hold, according to Schwab, given the competitiveness gap between the north and south of the region.

Middle East, Africa are 'hot spots': WEF's Schwab
Klaus Schwab, founder and executive chairman of the World Economic Forum, highlights risks going forward, and says that erosion of trust in governments is a growing concern.

"You see the gap between the high competitiveness of northern countries, particularly Germany and the Scandinavian countries, and you see the lagging behind of the Mediterranean countries, and France somewhere between," he said.

(Read more: Experts? Sometimes they get it wrong)

"It's absolutely crucial that we close this gap of competitiveness. And here I think France will be crucial because it is in the midst. It could improve; it could slide down, as we have seen in the latest reports."

A number of recent economic surveys from the country have disappointed, with France's composite purchasing managers' index (PMI) data falling to a 7-month low of 47.3 in December. By comparison, Ireland, Germany and Italy's composite readings all came in above the 50 mark which indicates expansion – and Spain recorded a 77-month high of 53.9.

Bridging gaps appears to be a key focus at Davos this year, with Pope Francis -- named TIME magazine's person of 2013 -- set to send a message to the event, delivered by a Cardinal tomorrow evening.

"I think it's a very important message: he's concerned with the fate of the poor," Schwab told CNBC.

"We just cannot have a society where we have two polarized ends. We have to find again a way to create coherent societies because only coherent societies can function and here the Pope's strong moral voice is very important, particularly coming at the beginning of this meeting, will set some kind of a roadmap for our discussions."

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