At Davos, mood is sombre as many CEOs question economic outlook

Business leaders at the World Economic Forum also see signs of hope: ‘There are all kinds of shoes that could have dropped’.

Participants are seen during a session of the World Economic Forum annual meeting in Davos. Picture: Fabrice Coffrini/AFP

The end of the free-money era has put a chill in the Swiss mountain air.

Business leaders and economists gathered here this week for the World Economic Forum’s annual event say they see the world buffeted by high interest rates that central banks have pushed through to combat inflation. That has created a threat of recession, and led some of the world’s biggest companies to hold their breath — and their spending — ahead of an uncertain year.

Yet some see reasons to think rising inflation, sparked in part by Russia’s invasion of Ukraine, has peaked. That could, as some business leaders hope, presage a soft economic landing. Alternatively, another rise in interest rates could lead to a more prolonged downturn.

Many businesses are cutting costs — and in some cases jobs — to be prudent, several business leaders said. But a number are also holding out hope that they won’t need to cut too deeply to take advantage of what some expect could be a rebound this year if major economies skirt a recession.

“The mood is sombre,” said Nick Studer, CEO of the Oliver Wyman Group consultancy, who has attended meetings in Davos for years. “At the same time, you’ve got a lot of people hoping that the US and the UK environment — if it’s recessionary — is either short or shallow.”

Whether the US dips into a recession this year remains an open question, many business leaders say. Executives have been preparing for the possibility for months, even as consumer spending has remained fairly strong and the unemployment rate stood at a historically low 3.5 per cent in December.

“I haven’t heard in 30 years being in business of people talking about the recession for so long,” said Christophe Beck, chairman and chief executive officer of Ecolab, a provider of services and products used in water treatment, cleaning and infection prevention. “We will get ready for it in a way and it might not even happen.” Indeed, the pessimism sparked last year by rapid interest-rate increases and expectations that would lead to a downturn may be ebbing.

C.P. Gurnani, chief executive of India-based information-technology company Tech Mahindra, said he travelled to Europe expecting people to be more downbeat about their economic prospects but “it’s not that negative.”

Gita Gopinath, first deputy managing director of the International Monetary Fund, said economic performance in both the US and Europe has surprised on the upside since October, when the IMF released its last economic outlook. This has led to risks being “somewhat more balanced going into 2023.”

Still, she said it would take a few more wage and price-inflation reports in line with the restrained increases reported recently before “we can start feeling much more comfortable about the inflation trajectory.” For now, the IMF thinks interest rates in the US will remain around 5 per cent through the year, she said.

Business leaders also are watching a handful of risks that could reset their calculus. Those include the potential for conflict between China and the US over Taiwan and the possibility of an impasse in the divided US Congress over raising the country’s debt ceiling — threatening a US government default.

Issues that caused headaches for business leaders throughout the pandemic, such as supply-chain snarls or construction delays, aren’t fully resolved, either, said Stanley Bergman, CEO of dental-products supplier Henry Schein.

Managing through the current economic climate is also complicated by the fact that some in business have little experience operating in periods of rising interest rates.

“If you talk to people on Wall Street who are 35 years and younger, they think it’s the end of the world,” Mr Bergman said. “You talk to people 50 and over, we’ve been through this many times.”

Wage inflation is also stabilising, making it less of an issue than earlier in the pandemic, said Annette Clayton, chief executive of North American operations at Schneider Electric, a Europe-headquartered energy-management and automation company. A slowdown in hiring in tech has also made it easier for other companies to woo workers, she added.

“You’re competing a lot less with an Amazon factory, Amazon distribution centre than you were just a year ago,” Ms Clayton said.

In talking with clients, executives at McKinsey & Co say they have noticed a shift. Last summer, with high oil prices and inflation rippling through the economy, many business leaders considered whether they should pause some projects and priorities, said Bob Sternfels, the firm’s global managing partner. “The sentiment now is: I have to move,” Mr Sternfels said. Many want to take action to seize on new technology or respond to climate change, he said.

Some see the downturn getting worse — particularly for big tech companies that grew into juggernauts in a free-money era and are now pivoting to austerity and lay-offs. Those companies are striking a more subdued tone at Davos this year.

“Davos was built on the idea that the world was getting better and more global and more honest and more tolerant and the economy worked better because of that,” said Alex Karp, chief executive of Palantir Technologies. “Well, it doesn’t look like we’re living there anymore,” he said, adding that “you see the results of that in firing and restructuring.”

Though political tensions remain between Washington and Beijing, some executives say they have underappreciated how China’s reopening could help their businesses. Those with operations on the ground in China have expressed optimism to peers that results there this year could be better than forecast. “There is without doubt a view that China will open up faster than some people anticipated,” said Tim Ryan, US chairman at professional-services firm PricewaterhouseCoopers, who has had conversations with executives across industries in recent days.

At the same time, many executives realise that war in Ukraine and other geopolitical issues remain out of their control. “That gets them down,” Mr Ryan said.

Still, Tech Mahindra’s Mr Gurani said the economies of India and countries in the Middle East are performing well, and in the US, unemployment remains low and many households are still able to book flights and travel.

“I think we are talking ourselves into recession,” he said. “I look at the data, and it’s not bad.”

-Bowdeya Tweh and Greg Ip contributed to this article.

The Wall Street Journal