UBS has produced a white paper on the New Global Context, the theme of the World Economic Forum Annual Meeting 2015 in Davos, Switzerland, on January 21-24. The white paper examines four key pillars of global development – US energy independence, technological innovation, the exit from loose monetary policy, and the environmental credit crunch. It also recommends solutions to related challenges for the global economy, including geopolitical tensions, financial vulnerabilities, and poverty.

The world economy has recently endured the most severe recession since the 1930s. Large parts of its financial system nearly perished in the process. The subsequent recovery has been weak, uninspired, and bedeviled by other significant strains, not least those that nearly tore the Eurozone apart. Disparities in income and wealth within countries have widened significantly. Political systems are struggling to cope with these stresses, with extremist parties and views on the rise. Regional conflict has re-erupted where it was previously dormant, and risks doing so elsewhere as well.

Against this backdrop, it is easy to be pessimistic – even alarmist – about the world’s economic prospects. However imperfectly, the outlook will, we believe, nonetheless continue to improve. Cyclical and policy conditions are mostly supportive, and low inflation is a plus. Economies are proving to be both more resilient and flexible than expected. The first signs of reform are emerging.

Perhaps the most enduring positive of all, human ingenuity, is alive and well, contributing breath-taking innovations at an electric pace. In areas ranging from energy to information technology, promising new innovations offer foundations for supply-side growth. We have estimated that the productivity gains over the next decade associated with today’s new technologies could be as propitious as those ushered in by the personal computer and internet during the 1990s. In some cases (e.g. mobile internet) they already offer new and affordable ways for individuals in some of the most economically challenged parts of the world to improve their standard of living, afford basic financial services, and offer their skills and services to others.

In a world where labor may face relative scarcity, and capital investment remains muted, efficiency gains from technology and new sources of cheap energy will be particularly important in driving productivity and growth. Yet, as we consider these new sources of potential economic efficiency, we also need to take a step back. Today’s global economy is incredibly complex. Supply chains are longer and more international than at any time in the past, even compared to a quarter century ago. Arguably, this very complexity has helped raise living standards worldwide by enabling large numbers of people to participate in the global economy in a way that was unimaginable a generation ago. But it also makes it even harder to identify potentially disruptive influences, or inefficient external costs, that new developments could introduce.

In this paper, published to accompany the World Economic Forum’s Annual Meeting 2015 in Davos, we will look at four key medium-term pillars of development: US energy independence, technological innovation, the exit from loose monetary policy, and our changing relationship with the environment. We will try to assess not only the direct impact they will have but also their wider consequences for the global economy.

In our view, governments and policymakers will need to consider the fragility of this interwoven economy. At a time when potential growth is low, the temptation to push through growth-boosting initiatives “at any cost” will be high. The threat such initiatives pose to long-run stability, however, is real. A unifying “cost” of all of the developments discussed is the negative impact they could have on poverty and global cooperation. Policymakers must try to seek fair outcomes for society, while trying harder than ever to find a happy middle ground among competing objectives. It will be critical for “solutions” not to result in overregulation that cripples growth and innovation. We believe the focus should be on a regulatory framework that supports macroeconomic objectives. In each part, we offer potential policy remedies to the issues raised.