DAVOS, Jan 20 (Reuters Breakingviews) - When the chairmen of some of the world’s largest companies got together behind closed doors at the World Economic Forum this week, they had plenty of reasons to feel sombre. Higher interest rates are putting a brake on economic growth, trade tensions are fracturing supply chains, and investors have just suffered their worst year since the 2008 financial crisis. Yet when the assembled crowd were asked how many of the companies represented had reported better profits last year, a majority raised their hands.
Call it the Davos paradox. The annual conflab in the Swiss mountains is synonymous with a model of globalised capitalism that is under attack from all sides. The WEF this year acknowledged those challenges, borrowing the trendy term “polycrisis” to describe the multi-dimensional dilemma posed by geopolitical confrontation, macroeconomic gyrations, and climate change. Multinationals from Microsoft (MSFT.O) to Goldman Sachs (GS.N) are cutting staff. And a large chunk of corporate chieftains seem pretty downbeat: of more than 4,000 chief executives consulted by PwC in October and November for a survey presented at Davos, 40% believe their company will no longer be economically viable in a decade’s time.
However, the captains of industry who travelled to Switzerland were less gloomy. “Things are not great, but they are much better than they could have been,” was how Daniel Pinto, JPMorgan’s (JPM.N) president and chief operating officer, summed up the prevailing state of mind.
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There are three broad reasons to be more upbeat. First, China is ditching its Covid-19 controls at a much faster rate than anyone expected. Though the virus is now ripping through the population, leading to an increase in hospitalisations and deaths, the reopening should eventually boost the country’s growth rate. Analysts at Standard Chartered expect the world’s second-largest economy to expand by almost 6% this year, double the rate in 2022.
Second, Europe has managed to keep the lights on. The combination of a warm winter, lower industrial energy usage, and a rapid shift to alternative sources of energy means the continent avoided the potentially disastrous power cut that some feared after Russia invaded Ukraine 11 months ago.
Third, inflation is showing some signs of easing. Though consumer prices in the United States and the euro zone were respectively 6.5% and 9.2% higher in December than a year earlier, the increase was slightly lower than in previous months. As a result, investors have lowered their expectations for future interest rate hikes. Equities have recovered: the S&P 500 benchmark of leading stocks is up more than 5% in the past three months, boosting the paper wealth of many Davos executives and financiers. One prominent investor argued markets now offer more opportunities for buying what he calls QARP, or quality at a reasonable price.
Many executives now think the United States and Europe will suffer only a mild recession this year and may even avoid economic contraction. Companies typically cut back on investment in a downturn, but big groups have reasons to keep spending. For one, executives remain determined to make their supply chains more resilient by boosting manufacturing capacity in countries like India, Turkey and Mexico. They’re also eager to take advantage of generous U.S. subsidies, even as European politicians fret that the policies fuel protectionism.
Yet it’s worth remembering that Davos, Inc does not reflect the world economy. Most of the corporate chieftains shuttling between meeting rooms, cocktail parties and restaurants this week mostly lead global businesses whose geographical spread and access to capital markets better equips them to weather economic shocks. Small- and medium-sized enterprises, which have fewer such buffers, are barely represented. Many startups, perhaps seeking to conserve their precious reserves of venture capital cash, also stayed away.
Moreover, the enthusiasm could prove fleeting. U.S. President Joe Biden’s administration is heading for a showdown with Congress about raising the country’s debt ceiling. Higher interest rates will prove more painful as households deplete savings built up during the pandemic. Corporate results may disappoint: UBS analysts point out that consensus forecasts currently assume that companies in the S&P 500, excluding financial and energy firms, will expand their profit margins this year. That seems unlikely at a time when wage, energy and interest costs are all rising. New military conflicts remain an enduring threat.
The Davos conflab has a well-deserved reputation for delivering a consensus which turns out to be wrong in the 12 months that follow. In January 2020, delegates barely registered the risk of a pandemic which shut down the global economy a few weeks later. As they head back down the mountain, the alpine elites may find that their improved mood does not last long.
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(The authors are Reuters Breakingviews columnists. The opinions expressed are his own.)
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