The mood among CEOs at the World Economic Forum in Davos was, if not upbeat, then at least no longer sombre. Back on earth, things look dicier
of the world’s biggest firms left Davos on January 20th after a week of jaw-jawing in highish spirits. The mood at the annual gabfest was, if not upbeat, then at least no longer sombre. Behind closed doors,s conceded that, although the war in Ukraine remains a humanitarian tragedy, the risks to the world economy look for now to be contained. Central banks have got serious about inflation. If a recession in America and Europe strikes, it should be manageable.
For many companies, costs are rising faster than sales. Businesses are finding that it is harder to resist wage rises than to persuade customers to bear rising costs. This will compress margins at a rate that has yet to be fully digested by analysts, who collectively still predict profits to grow in 2023. If the American economy does slide into a recession, as many economists expect, profits will almost certainly slide further still.
As demand falters, firms are owning up to excessive costs—their second confession. Technology companies, which saw appetite for their products slow last year from earlier pandemic-induced highs, are doing so with special zeal. Apple’s boss, Tim Cook, is taking a 40% pay cut this year. Twitter is auctioning off its neon-bird wall art. Less symbolically, on January 18th Microsoft announced plans to lay off 10,000 people.
That leaves investments. The 21st century’s mega-trends—decarbonisation, digitisation and decoupling between China and the West—argue in favour of mammoth spending on climate-friendly technology, robots and software, and non-Chinese factories. One European industrial boss contends that, as a result, capital spending should withstand the impending downturn better than usual.
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