In Cold Davos, Warmer Days Seen for the World Economy

AFP-Jiji

14:15 JST, January 21, 2023

DAVOS, Switzerland — An air of optimism for the global economy blew through Davos last week after fears that the war in Ukraine, an energy crisis and soaring inflation could trigger a global recession.

“It is less bad than we feared a couple of months ago,” IMF chief Kristalina Georgieva said at the final panel discussion for the World Economic Forum in the Swiss ski resort on Friday.

Georgieva signaled that the International Monetary Fund may raise its previous forecast of 2.7% global growth for this year when it publishes an update at the end of the month.

But she cautioned against high expectations.

“Less bad doesn’t quite yet mean good,” Georgieva said.

“Be careful not to get on the other side of the spectrum, from being too pessimistic to being too optimistic.”

European Central Bank president Christine Lagarde was similarly upbeat for the eurozone economy, saying the “news has become much more positive in the last few weeks.”

The rhetoric has shifted from talk of a recession in the 20-nation club to “a small contraction”, she said.

The ECB is expecting 0.5% growth in the eurozone in 2023, according to its latest forecast.

“So it’s not a brilliant year but it is a lot better than what we had feared,” Lagarde said.

A drop in energy prices that had soared following Russia’s invasion of Ukraine has fuelled the optimism. A mild winter has also eased fears of gas shortages.

German Chancellor Olaf Scholz told Bloomberg that his country, which was heavily reliant on Russian gas before the war, will avoid a recession that had been previously predicted for Europe’s biggest economy.

The world economy may also get another boost from China’s decision to scrap its zero-Davos policy.

Vice Premier Liu He told the WEF that the situation in his country has “comprehensively returned to normal.”

Liu invited “international friends” to visit his country, which has dropped quarantine requirements for overseas travel.

Official data last week showed that the world’s second-biggest economy and major driver of global growth expanded by just 3.0% in 2022, its weakest performance in 40 years.

But Liu said the Chinese economy would “see a significant improvement” in 2023.

Lagarde said China’s COVID policy shift “will kill many people” but will “also revive the economy.”

It will be both “positive for China” and the rest of the world, she added.

– Tech layoffs –

But the world economy is not out of the woods just yet.

China’s economic rebound could put more pressure on inflation as demand in the country surges back.

Inflation has started to ease in the United States and Europe after central banks unleashed a wave of jumbo interest rate hikes to get prices under control.

Investors hope that central banks will slow their monetary tightening, but a resurgence of inflation would probably prompt the U.S. Federal Reserve and others to maintain their hardline stance.

Rate increases slow economic activity as borrowing costs rise.

The U.S. tech sector is already feeling the effects of the economic slowdown, with companies announcing tens of thousands of layoffs.

Google’s parent company Alphabet announced 12,000 job cuts on Friday, just days after Microsoft said it would slash 10,000 positions.

– Trade spat –

There is also concern about a brewing trade spat between the United States and Europe over Washington’s $369-billion program to subsidize electric cars, solar panels and other clean-tech crucial to the U.S. energy transition.

Europeans fear that their companies will move to the United States to seize on the massive public spending.

French Finance Minister Bruno Le Maire said in Davos that Europe should be quicker at dispensing aid but rejected accusations of protectionism.

Cecilia Malmstroem, a former European trade commissioner, disagreed.

“There is definitely an international protectionist wave,” she told AFP.