At Davos, Mood Is Somber as Many CEOs Question Economic Outlook

Business leaders at the World Economic Forum also see signs of hope: ‘There are all kinds of shoes that could have dropped’

By guest authors Chip Cutter and Sam Schechner. Bowdeya Tweh and Greg Ip contributed to this article.

Politicians and top executives gather in Davos, Switzerland, for the annual World Economic Forum.Photo: Stefan Wermuth/Bloomberg News


DAVOS, Switzerland—The end of the free-money era has put a chill in the Swiss mountain air.

Business leaders and economists gathered here for the World Economic Forum’s annual event say they see the world buffeted by high inflation—and high interest rates that central banks have pushed through to combat it. That has created a threat of recession, and led some of the world’s biggest companies to hold their breath—and their spending—ahead of an uncertain year.

Yet, some see reasons to think 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 slashing costsand in some cases jobs—to be prudent, several business leaders said. But a number are also holding out hope that they won’t need to cut too deeply to take advantage of what some expect could be a rebound this year if major economies skirt a recession.

“The mood is somber,” said Nick Studer, chief executive of the Oliver Wyman Group consulting firm, who has attended meetings in Davos for years. “At the same time, you’ve got a lot of people hoping that the U.S. and the U.K. environment—if it’s recessionary—is either short or shallow.”

Whether the U.S. dips into a recession this year remains an open question, many business leaders say. Executives have been preparing for the possibility for months, even as consumer spending has remained fairly strong and the unemployment rate stood at a historically low 3.5% in December.

“I haven’t heard in 30 years being in business of people talking about the recession for so long,” said Christophe Beck, chairman and CEO of Ecolab Inc., a provider of services and products used in water treatment, cleaning and infection prevention. “We will get ready for it in a way and it might not even happen.”

The pessimism sparked last year by rapid interest-rate increases and expectations that would lead to a downturn might be ebbing.

Larry Summers, the former Treasury secretary, said he has become less pessimistic about the Federal Reserve’s actions, and now believes that the economy is unlikely to experience massive financial trauma in the months ahead.

Davos attendees “are sort of daring to be hopeful but not entirely convinced of being hopeful,” Mr. Summers said. He has predicted that to bring inflation down, a recession would be necessary. He still doesn’t expect a soft landing, when growth slows but doesn’t turn negative. “But it looks more plausible to me that there would be a soft landing than it did, principally because the economy is staying strong.”

The world has also avoided some potential problems, such as widespread energy outages in Europe, oil prices above USD 150 a barrel and a new Covid variant that could cripple society, he said.

“There are all kinds of shoes that could have dropped that have not dropped,” Mr. Summers said.

Gita Gopinath, first deputy managing director of the International Monetary Fund, said economic performance in both the U.S. and Europe has surprised on the upside since October, when the IMF released its last economic outlook. This has led to risks being “somewhat more balanced going into 2023,” she said.

Still, she said it would take a few more wage and price-inflation reports in line with the restrained increases reported recently before “we can start feeling much more comfortable about the inflation trajectory.” For now, the IMF thinks interest rates in the U.S. will remain around 5 % through the year, she said.

Business leaders also are watching a handful of risks that could reset their calculus. Those 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 country’s debt ceiling—threatening a U.S. government default.

Issues that caused headaches for business leaders throughout the pandemic, such as supply-chain snarls or construction delays, aren’t fully resolved, either, said Stanley Bergman, CEO of dental-products supplier Henry Schein Inc.

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

“If you talk to people on Wall Street who are 35 years and younger, they think it’s the end of the world,” Mr. Bergman said. “You talk to people 50 and over, we’ve been through this many times.”

Wage inflation is also stabilising, making it less of an issue than earlier in the pandemic, said Annette Clayton, CEO of North American operations at Schneider Electric SE, a Europe-headquartered energy-management and automation company. A slowdown in hiring in tech has made it easier for other companies to woo workers, she added.

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

The war in Ukraine is adding to uncertainty about the coming year.Photo: Kyodonews/Zuma Press

Some see the downturn getting worse—particularly for big tech companies that grew into juggernauts in a free-money era and are pivoting to austerity and layoffs. Those companies are striking a more subdued tone at Davos this year.

Matthew Prince, CEO of cloud-infrastructure company Cloudflare Inc., said that in his conversations with clients, many say that business is slowing and that they are looking to cut costs. Cloudflare itself has slowed some hiring to weather a downturn.

“Anyone who’s not nervous isn’t paying attention,” Mr. Prince said. “Customers are saying: These are tough times.”

Still, some executives say they have underappreciated how China’s reopening could help their businesses. Those with operations on the ground in China have expressed optimism to peers that results there 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, U.S. chairman at professional-services firm PricewaterhouseCoopers LLP, who has had conversations with executives across industries in recent days.

At the same time, many executives realize that the war in Ukraine and other geopolitical issues remain out of their control. “That gets them down,” Mr. Ryan said.