In Davos, the mood is sombre as many CEOs question the future of the economy

0
31

Business leaders and economists gathered here this week for the World Economic Forum’s annual event say they see the world plagued by inflation and the high interest rates that central banks have pushed to combat it — and the threat of a recession, as those rates at least some are stifling demand. That’s leading some of the world’s largest companies to hold their breath — and their spending — ahead of an uncertain year.

The question they ask is whether the rising inflation, partly caused by the Russian invasion of Ukraine, has reached its peak. That could, as some business leaders hope, portend a soft economic landing. Alternatively, another rate hike could lead to a longer downturn.

Many companies are cutting costs — and, in some cases, jobs — to err on the side of caution, several business executives said. But some are also hoping they won’t have to cut too deeply to take advantage of what some say could be an uptick this year if the major economies avoid recession.

“The mood is sombre,” said Nick Studer, CEO of the consulting firm Oliver Wyman Group, who has attended meetings in Davos for years. “At the same time, you have a lot of people hoping that the US and the UK – if it’s a recession – is short or superficial.

Whether the US will slip into recession this year remains an open question, many business leaders say. Executives have been preparing for the possibility for months, even though consumer spending has remained quite strong and the unemployment rate stood at an all-time low of 3.5% in December.

ALSO READ  John Kerry says 'money, money, money' is most needed to tackle climate change

“I haven’t heard people talk about the recession for so long in my 30 years of business,” said Christophe Beck, chairman and CEO of Ecolab Inc., a provider of water treatment, cleaning and infection prevention services and products. “We’ll prepare for it in a sense and it might not even happen.”

Business leaders are also keeping an eye out for a handful of risks that could reset their calculus. Those include the potential for a conflict between China and the US over Taiwan and the possibility of a deadlock in the divided US Congress over raising the country’s debt ceiling, threatening bankruptcy of the US government.

Issues that were troubling business leaders during the pandemic, such as supply chain problems or construction delays, have also not been fully resolved, says Stanley Bergman, CEO of dental supply company Henry Schein Inc.

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

“When you talk to people on Wall Street who are 35 and under, they think it’s the end of the world,” Mr. Bergman said. “You’re talking to people 50 and older. We’ve been through this many times.”

ALSO READ  Focus - Another winter of dissatisfaction? UK sees massive strike action amid cost of living crisis

Wage inflation is also stabilizing, making it less of a problem than earlier in the pandemic, said Annette Clayton, CEO of North American operations at Schneider Electric SE, a European-based power management and automation company. A slowdown in technology hiring has also made it easier for other companies to court employees, she added.

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

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

Some see the downturn getting worse, especially for big tech companies that grew into juggernauts in an era of free money and are now turning to cutbacks and layoffs. Those companies are striking a more subdued tone at Davos this year.

“Davos was built on the idea that the world got better and more global and fairer and more tolerant and the economy worked better as a result,” said Alex Karp, CEO of Palantir Technologies Inc. it looks like we don’t live there anymore,” he said, adding that “you see the results of that in layoffs and restructuring.”

ALSO READ  BJP planned to win Tripura again

While political tensions between Washington and Beijing remain, some executives say they underestimate how China’s reopening could help their businesses. Those with ground operations in China have expressed optimism to colleagues that results there could be better than expected this year. “There is no doubt that China will open up faster than some people expected,” said Tim Ryan, president of US professional services firm PricewaterhouseCoopers LLP, who has held talks with executives from various industries in recent days.

At the same time, many executives are realizing that war in Ukraine and other geopolitical issues are beyond their control. “That brings them down,” said Mr. Ryan.

Not all executives take a gloomy view of the global economy during the annual confab. The economies of India and Middle Eastern countries are doing well, and in the US, unemployment remains low and many households are still able to book flights and travel, said CP Gurnani, CEO of India-based information technology company Tech Mahindra. Ltd. Mr Gurnani said he had traveled to Europe expecting people to be gloomier about their economic outlook, but “it’s not that negative.”

“I think we’re 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.