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WEF 2023: Doom and gloom turn to cautious optimism

Divya Chowdhury
Divya Chowdhury
Editor, Global Markets Forum

The Global Markets Forum reported live from Davos once again on the most pressing issues impacting markets, business and the world today. Editor Divya Chowdhury summarises her key reflections from speaking with policymakers, CEOs and fund managers at WEF 2023.

  1. Despite concerns around inflation running high, a tone of optimism emerged at WEF, with attendees predicting the United States and Europe to experience only a mild recession.
  2. Many corporates interviewed see Asia as the potential engine for the next leg of global growth, particularly with India taking a leading position in the rollout of 5G.
  3. For more actionable insights, register to join the GMF as we continue to tackle the topics that most impact financial professionals.

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The World Economic Forum’s annual meeting at Davos this year began on a note of doom and gloom as the prospect of an imminent global recession featured high on the worry list of participants.

Two-thirds of private and public sector chief economists surveyed by the WEF expected a global recession this year, while a survey of CEO attitudes by PwC was the gloomiest since the “Big Four” auditor launched the poll a decade ago.

Companies that did well in 2022 are likely to see a more challenging year ahead, PwC Global Chairman Bob Moritz told the Reuters Global Markets Forum (GMF) at Davos.

WEF participants agreed the world was in a “polycrisis”, a trendy term to describe the threats posed by geopolitical tensions, macroeconomic gyrations with higher interest rates putting the brakes on economic growth and trade tensions fracturing supply chains, and climate change.

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Axel van Trotsenburg, managing director of operations at the World Bank, was worried about the debt distress that many emerging economies were facing. “That makes it a very complicated operating environment.”

“The three big growth bubbles are growing below expectations – the U.S., eurozone and China. That has its ripple effects,” Trotsenburg told GMF. The World Bank forecasts growth for the U.S. at 0.5 percent, and for the euro area to stay flat.

As the week progressed, many policymakers and senior company executives in attendance at the Swiss ski resort began to sound less gloomy. They were now expecting the United States and Europe to experience only a mild recession this year, or even just a slowdown.

“I think the paradigm has shifted radically [since] we woke up on January 2,” said Jay Collins, vice chairman of banking, capital markets and advisory at Citi. “It’s a sense that [inflation has] peaked and… we’re not going to have a 5.5 percent [Fed] terminal rate. It’s 5 percent or south of that.”

“There is a sense of a benign 2023 that did not exist when we went home for Christmas. It’s not that all of the data radically changed, but it changed enough to hit the ‘recalc’ button on literally everything,” Collins told GMF.

Collins believes the Fed may hold rates at these elevated levels for longer. “That means we have the end of the strong dollar, the end of the perception that the rate differential can continue to spread and drive fund flows out of the emerging markets and into the dollar.”

Still, risks were plentiful, including inflationary pressures from China’s reopening, rising debt distress in the developing world, and Western nations battling to bring inflation down to 2 percent.

Open for business

China’s economic tsar Liu He made a big pitch for foreign investment at Davos on the first visit abroad by a high-level Chinese delegation since Beijing shelved its three-year-old zero-COVID policy.

“Come summer or fall, China will be moving to the second phase of reform and opening up… that could certainly help the world also grow and ease the pain of a lot of industrial countries, including Europe,” Siemens Energy Chairman Joe Kaeser told GMF.

Many corporates we interviewed on GMF see Asia as the potential engine for the next leg of global growth.

While China’s reversal of its zero-COVID policy may pose some short-term challenges, Manulife CEO Roy Gori expected activity to pick up in the second half of the year, providing impetus to Asia and the rest of the world.

Not all parts of the world are experiencing the same economic environment, said Andy Baldwin, global managing partner-client service at EY.

It is very asymmetric,” Baldwin told GMF, adding that he sees India, parts of Asia, and the Asian-Middle East continuing to experience strong growth.

Bharat Kaushal, managing director at Hitachi India, thinks India could have a part to play, especially if the world goes into a recession, which will be challenging for certain industries.

“I think the world is going to see India beyond China plus one… as a case where ‘for India’ and ‘from India’ will certainly take more centre stage,” Kaushal said, adding that this could be an opportunity for India “if we get it right”.

India is a key market for Ericsson, the telecom hardware firm’s chief technology officer Erik Ekudden told GMF, adding that the South Asian nation was “also setting an example for the rest of the world”.

“India is on a path to really take a leading role in 5G and that’s why we are very, very certain that India will use 5G in the way it was intended, which is to have coverage of 5G everywhere… using the latest technology that is also rolled out in Korea, Japan, U.S. and of course Europe,” Ekudden said.

“India is very rapidly ramping up. I would not be surprised if we see that India, in terms of volumes, will not only overtake Europe, [but] will match the US in terms of buildout and volumes, and also get closer to where China is,” Ekudden added.

Inflation Reduction Act

IEA head Fatih Birol dubbed America’s Inflation Reduction Act (IRA) “a game changer for climate change”, even though the Europeans had plenty to gripe about it.

Citi’s Collins agreed with Birol. He expected the IRA to drive capital towards technologies, energy transition and funding accelerated mechanisms to transition, which he said was a “good thing for the world”.

“The U.S., Europe, China and India, everyone [is] trying to spend to find accelerated ways to fund transition… the more competitive that is, the better,” Collins said.

Pressure is increasing on global financial institutions to finance the global transition to a greener future much faster than they have been doing so far. Other exogenous events such as geopolitics and cybersecurity risks are further complicating matters. Consensus is elusive.

The number of organisations pledging to get to net-zero emissions by mid-century has soared in recent years, up 60 percent to more than 11,000 in September 2022, U.N. figures showed. Yet the world remains on course to miss its climate goals.

IBM’s Chief Commercial Officer Rob Thomas told GMF that companies which initially viewed sustainability as a cost now see it as an opportunity to boost productivity and efficiency.

“In many cases, there’s a great ROI (return on investment) to doing sustainable work and sustainable practices. The projects pay for themselves, plus you get the benefit of doing the right thing, which I like to believe most people want to do,” he said.

“I think at Davos, a year from now, you’ll see a lot more [of those] companies walk down the path here,” Thomas added.

Even as U.S. climate envoy John Kerry said time was running out for the world to tackle climate change and what was most needed to tackle this challenge was “money, money, money”, the Davos conflab failed to come up with any more concrete steps to get the world to a low carbon economy in time to avoid the worst impacts for some of the most vulnerable people.

On the 1.5 degrees target, IEA head Fatih Birol told GMF: “I believe it is very difficult, but it is still achievable. To write the obituary of the 1.5 degrees target is far too early, it is factually wrong and politically irresponsible.”

Transcripts of all our interviews from Davos can be found here.

(With inputs from Savio Shetty and Lisa Pauline Mattackal)

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What were the outcomes form WEF?

Despite concerns around inflation running high, a tone of optimism emerged at WEF, with attendees predicting the United States and Europe to experience only a mild recession.