By Tim Weber
Business Editor, BBC News website, in Davos
Davos delegates are focusing on the world's economic imbalances
China and US consumers will determine the fate of the global economy in 2006, according to experts at the World Economic Forum.
So far the world economy had been far more resilient than predicted, they said, managing to live with high oil prices and US deficits.
However, they warned that China's current economic model was not sustainable.
Spending and savings habits of US consumers would have to change as well.
Speaking at the traditional "update" on the global economy at the start of the World Economic Forum (WEF), AIG vice-chairman Jacob Frenkel said the dire predictions of a dollar slump had not materialised because the US economy was much more robust, flexible and competitive than many had assumed.
High oil prices had also failed to have a major impact, he added, because the intensity of oil use was much lower than in the past.
"The experience of the oil shocks in the 1970s is not a guide for the future," Mr Frenkel said.
The economists agreed that high oil prices were here to stay, not least because oil refineries around the world were working at full capacity, and demand from key countries like India, China and the United States showed no signs of abating.
The dollar that didn't fall
But the panellists also warned not to take their predictions too seriously.
A year ago, they agreed that the US dollar would come tumbling down, weakened by the massive current account deficit of the US economy.
Big investors like Microsoft boss Bill Gates and legendary money manager Warren Buffett even bet huge sums on it.
Security is tight in the streets of Davos outside the forum
However, the dollar managed to climb back from its record low against the euro.
Searching for explanations, Morgan Stanley chief economist Stephen Roach said the fact that the dollar had not declined for a third year did not mean the economic fundamentals had changed.
But the panel could not agree on how far the US dollar had to fall.
Laura Tyson, dean of the London Business School, said there was "a substantial dollar decline out there, maybe 30%", although it could come gradually.
Others were less pessimistic about the dollar. Zhu Min, executive assistant president of the Bank of China, a state-owned commercial bank, predicted a slide of no more than 3 to 5%.
Jacob Frenkel, however, said there would be no flight from the dollar: "The more you hold an asset, the more vulnerable you are to the collapse in the price of this asset", which in turn would stop Asian countries with huge dollar reserves doing anything that would bring about a collapse of the currency.
Stephen Roach, a notorious "bear" - or pessimist - said the world economy had still to come to grips with its "serious imbalances".
Nobody should rely on Asian governments continuing to buy US bonds, thus financing the country's deficit spending.
"There is a danger of complacency," Mr Roach warned.
The weakest link in the global economy was the US consumer, he warned, saying that "2006 will see the end of the great American spending binge".
Not everybody was that bold, but all economists agreed that US consumers had to increase their savings rate very soon.
The Chinese problem
But like most of Davos, the economists were transfixed by the state of the Chinese economy.
On Wednesday, China confirmed that its economy had grown by 9.9% during 2005 - making it the world's fourth-largest economy, overtaking both France and the UK.
Chinese textile exports surged in 2005
This follows a change in measuring the country's output in December last year, which increased Chinese GDP by 16.8%.
In all likelihood, China's economy is even larger, said Bank of China's Zhu Min.
Current statistics did not count the economic contributions of thousands of small enterprises across the country, he said. "Another correction by 15-20% seems reasonable, and there is room to grow."
All panellists, however, doubted that this was sustainable.
China's growth is driven mainly by foreign investment and exports.
"If that's the economic model, China is in trouble," said Mr Roach.
Demand for Chinese products could fall any time, either because of a slump in US consumer spending or following trade disputes.
Massive investments, Mr Zhu added, had already resulted in overcapacity in some industries, for example steel.
The Chinese government, Mr Zhu said, had to boost domestic consumer spending - not an easy feat in a country with a savings rate of 45%.
But with China set for further growth, Mr Frenkel said, the rise of China would result in a fundamental shift in the centre of gravity of the world economy.