Sometimes, optimism can be contagious.
The jubilant mood in financial markets, with global stock markets rising nearly 4 percent in the first three weeks of the year, spilled over this week into the permeated atmosphere of the World Economic Forum in Davos.
The annual meeting of business, economic and political elites in the Swiss Alps differs in opinions. But it is an ideal place to gauge global temperature on economic sentiment – and the consensus seems to be that conditions have softened and become more positive.
Many predicted that 2023 would bring lasting effects from the Russian war in Ukraine, the continued weakness of the Chinese economy, and the devastating effects of soaring energy and food prices on living standards around the world.
Instead, delegates came to the mountains to cheer about three new developments that improve the outlook.
First, China’s decision to end its zero-Covid policy raised hopes of a recovery for one of the world’s three great economic regions. Second, a drop in wholesale natural gas prices of more than 80 percent was expected to bring relief to other Europe. Finally, the Inflation Reduction Act, which provided huge support for the green transition, was expected to power the other leading global economic region in North America.
Many business leaders felt that the prospects for their companies had changed from what they were a few months ago.
In a forum session that was meant to discuss the cost-of-living crisis, Unilever CEO Alan Jope said his company was “preparing for retaliatory spending” from Chinese consumers spending savings accumulated over three years of Covid lockdowns.
Vicki Hollub, CEO of US oil company Occidental, said green subsidies in the US Inflation Reduction Act would allow for significant investments in carbon dioxide capture and storage that are positive for growth and the environment. She said, “It’s one of the most transformative clips of Bill ever in the world, and it will jump start a lot of things.”
European business leaders were more cautiously optimistic. Deutsche Bank CEO Christian Swing spoke of “more optimism about the economy,” and Jean-Marc Olanier, chief executive for Europe at Accenture, said most European CEOs were “optimistic about the year ahead, [having risen] For the challenge to be more flexible.
But the general expectation now is growth, not the deep recession in Europe that most economic forecasts predicted only a few weeks ago.
Political leaders quickly discovered the false positive. German Chancellor Olaf Scholz predicted his country would avoid a recession, while Ursula von der Leyen, the president of the European Commission, promised to ease state aid rules to speed up Europe’s move toward clean energy and took credit for lower natural gas prices. “Through our collective effort, we have lowered gas prices faster than anyone expected,” she said in the main hall. Andrew Bailey, Governor of the Bank of England, said this week on a visit to Wales that the UK’s prospects have also improved with the lower cost of natural gas.
However, the Europeans were lost at Davos by Liu He, China’s vice premier, who predicted growth in his country would rebound from a lackluster 3 percent to a typical 5.5 percent. To the delight of American business leaders at a private lunch, he declared, “China is back.”
The difference now compared to last fall is “like heaven versus hell,” said Josef Sekela, the Czech Minister of Industry. He added, “Well, Heaven is not as affordable as it used to be [Russia’s invasion of Ukraine]But it’s affordable.”
If these comments are largely country-specific and anecdotal, one can also listen to international organizations that have decided to change their view of the global economy.
The International Monetary Fund, which said at the start of the year that 2023 would be stronger than 2022, signaled a change of course. Kristalina Georgieva, the company’s director, said her new message was “it’s less bad than we feared two months ago”.
She suggested that the International Monetary Fund would come out with new forecasts within a week that were likely to be raised, though she cautioned people to expect a “significant improvement”.
Meanwhile, the International Energy Agency in Paris forecast record oil demand this year, “with nearly half of the gains from China following the lifting of Covid restrictions” and a continued rise in jet fuel production to counter the rapid rebound in global travel.
Even some of the most downbeat voices of 2022 felt they needed to tone down. Larry Summers, professor at Harvard Kennedy School and former US Treasury Secretary, ended the public warning of recession and high unemployment in the United States.
Still, he told delegates on Friday that he felt “a little bit of relief.” He said lower energy prices, waning populism, signs of lower inflation and a reopening in China would all help avert a recession in many economies around the world. “We should feel better than we did a few months ago.”
Flies in the ointment
However, in almost every celebration, there are some party spectators. And in Davos and beyond, central bankers have been calling for no music.
They said that while the improved outlook should be welcomed, more aggressive spending patterns would complicate the ongoing battle against inflation. Lyle Brainard, vice-chairman of the Federal Reserve, urged “time and resolve” on higher interest rates, while Christine Lagarde, president of the European Central Bank, said it was more important than ever to “stay on course.”
Their concern is that while core inflation rates are declining and will decline rapidly in 2023, underlying measures are not declining as quickly and core inflationary pressures remain strong and could derail a return of price stability to inflation rates close to 2 percent.
Business leaders were also far from naive about the prospect that central bankers will have to work hard to bring down inflation permanently in 2023.
Ziyad Hindu, chief investment officer of the Ontario Teachers’ Pension Plan, which has about C$250 billion in assets, warned that an improving economy could drive prices up even more. “The reopening of China is good news for the global economy, but last year’s significant slowdown was a big drag on commodity prices, and now they’re back. It’s going to put pressure on inflation again,” he said.
Lagarde warned governments in Europe not to make their lives more difficult by increasing subsidies to businesses and consumers, von der Leyen promised. We will do what is necessary [on interest rates]. “We don’t want to be pushed to do more than is necessary,” she said.
And while the immediate outlook was more positive than before, there was far less consensus in Davos on the longer-term questions of how to foster better prospects for growth, living standards and sustainability.
Business and economic leaders welcomed the progress made in the corporate sector with regard to the environment. Some were optimistic that growth in the medium term could be driven by investments in clean energy. Tharman Shanmugaratnam, Singapore’s senior minister and longtime official on the international economic stage, said increasing business investment into green technology would be a “huge boost to growth”.
But others worry that, in a world still likely to be dominated by large shocks, short-term stresses will begin to dominate again, limiting green transition and building resilience in supply chains and other parts of the business.
Summers said the best way to ensure consistent economic performance is to maintain confidence in the institutions that underpin the global economic system. “Better institutions that catalyze better and more efficient resource mobilization are more important than allocating more resources to any given priority,” he said.
Another long-term question has been how seriously China will pledge allegiance to this international economic system. Most business leaders who listen to Liu, who is the administration’s top economic official, have bought into his message that he wants to reconnect with advanced economies.
But Liu is expected to step down this year and more weary commentators are questioning a drastic change. “Every time Chinese officials visit the Swiss mountain resort they say similar things,” said Mark Williams, chief Asia economist at Capital Economics, while “companies on the ground suggest it’s getting tougher to operate.”
The motives of the United States have also been the subject of intense scrutiny. Was its ban on exporting technologically advanced microchips to China intended to undermine that country’s economic progress? Was the real motive for the inflation bill part of pure protectionism to put America first at the expense of Europe?
With the ambitions of the world’s two largest economies blurred, leading figures have warned that fractured global trade flows and economic relations could dampen the economic mood this year – and beyond.
“How we approach supply chain security is very important,” Georgieva said. “If we are like an elephant in a china shop and destroy a trade that has been an engine of growth for many decades, then the cost [could be] A loss of up to 7 percent of GDP – $7 trillion.” Her message to leaders: “Keep the global economy integrated for the benefit of all of us.”
Additional reporting by Katie Martin and Yuan Yang
data visualization by Keith Fry