Mood Turns a Lot More Gloomy in Davos

DAVOS: Corporate chiefs fear momentum behind growth is likely to slow amid global uncertainty

As Takeshi Niinami, chief executive of Japan’s Suntory Group, moved around this year’s World Economic Forum in Davos, he could sense a shift in the corporate mood. “Compared with last year it is a lot more gloomy,” observed Mr Niinami, who has been coming to Davos for more than a decade.

It was a sentiment echoed by many business leaders this week. In January 2018 the Davos event was shaped by a surprising sense of exuberance, as executives hailed the strong pace of global economic growth, and business-friendly policies unveiled by US president Donald Trump — who swept into the Swiss town, mesmerising the attendees.

This year, however, there was a striking paucity of national leaders: figures such as Mr Trump, Theresa May of the UK, Justin Trudeau of Canada and Emmanuel Macron of France all stayed away due to domestic woes.

And while that created a vacuum which pushed more chief executives into the spotlight, the lack of political star power was accompanied by a distinctly downbeat — if not nervous — atmosphere. “The mood is pretty flat this year,” said the head of one private equity fund.

That gloom did not stem from micro-level pessimism: almost every chief executive stressed that the outlook for their own company and sector seemed reasonably good. “From CEOs, I didn’t pick up a lot of negativity. The operating performance of companies don’t seen to be impacted by fundamentals,” said Nikos Stathopoulos, partner at private equity firm BC Partners.

But on a macro-level chief executives fear that the momentum behind global growth is likely to slow this year, as central banks tighten monetary policy, China grapples with domestic woes, economies such as Germany weaken — and America’s decade-long recovery runs out of steam. “There is less optimism across the board. You cannot ignore the fact the growth that is expected is not as strong as people liked,” Mr Stathopoulos said.

Worse still, the spectre of political risk is now haunting the C-suite to a degree that few western executives have seen before in their careers. “Generally speaking the economy is still relatively strong: we see that the demand for IT continues to grow,” said Antonio Neri, chief executive of Hewlett-Packard. “But there is political instability — we have globalisation and nationalism happening at the same time.”

One immediate consequence of this political risk is the uncertainty around the US-China trade war. This week almost every chief executive insisted that they had taken measures to protect themselves from any trade fallout. “Everyone is re-engineering supply chains,” said the American chief executive of an industrial group with large Chinese exposure.

But behind the scenes opinions were sharply divided about what might happen next. Some observers were optimistic. “My prediction is that a deal will be done — and soon,” the head of one investment bank told his clients. Indeed, Ivan Glasenberg, chief executive of Glencore, told a group of Davos attendees he expected the US/China trade situation to be solved sooner rather than later, “possibly before the Chinese new year”.

However, others disagreed. “We expect lots of volatility in 2019,” confessed the head of a large Asian sovereign wealth fund. “For us the number one risk is the China economy, and the number two risk is US-China trade.” And what really worried some chief executives was a perception that even if the Chinese agreed to make significant concessions on tariffs to the Americans, China and the US are heading for a long-term clash about who will control technologies such as 5G mobile.

“I don’t think economists or investors have really factored in what could happen if the White House really tries to take China out of the supply chain in technology,” confessed one Canadian asset manager. “For me, this is a huge risk now and the fight is going to grow.”

The possibility of a no-deal Brexit is sparking almost as much alarm in the short term. Some business leaders insisted that this event would be so damaging that the chance political leaders might let this occur were receding. “Everyone knows they have to remove that tail risk,” said Axel Weber, chairman of UBS, who now considers a no-deal Brexit “to be less and less likely”.

But others were less sure. “Brexit is the nightmare scenario which people have not prepared for — [it] could have lots of unintended consequences,” one European chief executive told his colleagues. “I don’t think it can be discounted at all.”

Either way, the one thing that almost every chief executive agreed on in the Davos debates is that the toxic combination of populism, protectionism and nationalism that is haunting countries from Brazil to the UK is unlikely to disappear soon — and technological changes such as artificial intelligence could make this worse. And that prompted many chief executives this week to engage in a new wave of discussions about how to dampen down the mood of anger, through social activism.

“Last year we talked about AI adoption in society and people were optimistic — but this year the conversation is more realistic, and people are talking about retraining and reskilling,” Mr Niinami said.

“People [in Davos] are realising that we have to start operating for the social good or we risk being kicked out — we have all this nationalism and populism and we know that if the economy is gloomy this could get worse.”