Davos Attendees Worry About Economic Outlook

At the World Economic Forum in Davos, Switzerland, the mood is more subdued than in past years, as the era of easy money comes to an end.

At the World Economic Forum's annual event this week, business leaders and economists said they see the world buffeted by inflation and high interest rates that central banks have pushed through to combat it. They warned that this could lead to a recession as demand is choked off by high interest rates. As a result, some of the world's biggest companies are holding back on spending in anticipation of an uncertain year ahead.

The question they are raising is whether 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 jobs to stay afloat during the pandemic. However, some businesses are holding out hope that they won't need to make too many cuts to take advantage of what could be an economic rebound this year.

Nick Studer, CEO of the Oliver Wyman Group consultancy, who has attended meetings in Davos for years, said that the mood at this year's event is somber. However, he added that there is also a lot of hope among attendees that the current economic downturn in the United States and United Kingdom will be short-lived.

There is no clear consensus on whether or not the United States will enter a recession this year, with many business leaders expressing differing opinions. Some executives have been preparing for the possibility of a recession for months, even though consumer spending has remained fairly strong and the unemployment rate was at a historically low 3.5% in December.

Christophe Beck, chairman and CEO of Ecolab Inc., said that he hasn't heard people talking about the recession for so long in his 30 years in business. He noted that while they will get ready for it, it might not even happen.

Business leaders are also keeping an eye on a few risks that could change their plans. These include the potential for conflict between China and the U.S. over Taiwan, and the possibility of an impasse in the divided U.S. Congress over raising the debt ceiling, which could threaten a U.S. government default.

The pandemic has caused a number of issues for businesses, such as supply-chain snarls and construction delays, which are yet to be fully resolved, according to Stanley Bergman, CEO of dental-products supplier Henry Schein Inc.

The current economic climate is complicated by the fact that some businesses have little experience operating in periods of rising interest rates. This makes it difficult for managers to make decisions that will keep the business afloat.

"There's a big difference in perspective between older and younger people on Wall Street," Mr. Bergman said. "The older folks have been through this kind of thing many times before, so they're not as worried. But the younger people think it's the end of the world."

Annette Clayton, chief executive of North American operations at Schneider Electric SE, said that wage inflation is stabilizing, making it less of an issue than it was earlier in the pandemic. She added that a slowdown in hiring in the tech sector has made it easier for other companies to attract workers.

"You're competing a lot less with an Amazon factory or Amazon distribution center 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 current economic downturn as getting worse, particularly for big tech companies that grew into juggernauts during a period of easy money and are now pivoting to austerity and layoffs. Those companies are striking a more subdued tone at Davos this year.

According to Alex Karp, CEO of Palantir Technologies Inc., Davos was founded on the belief that the world was becoming a better place. However, he says that this is no longer the case, and that the current state of affairs is reflected in the high levels of firing and restructuring taking place.

Despite ongoing political tensions between the US and China, some executives say they have underestimated how quickly China will rebound economically. Those with operations in China have expressed optimism to their peers that results 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 LLP.

Ryan added that he has had conversations with executives across industries in recent days, all of whom share this optimistic view.

Many executives realize that they can't control everything, especially war in Ukraine and other geopolitical issues. This can be discouraging, but it's important to remember that we can't control everything in life.

At the annual confab, not all executives held a dour outlook about the global economy. The economies of India and countries in the Middle East are performing well. In the U.S., unemployment remains low and many households are still able to book flights and travel, said C.P. Gurnani, chief executive of India-based information-technology company Tech Mahindra Ltd. Mr. Gurnani said he traveled to Europe expecting people to be more downbeat about their economic prospects, but it’s not that negative.

"I think we are talking ourselves into a recession," he said. "I look at the data, and it's not as bad as people think."