WEF at Davos 2023: Risk of global recession high, say economists

One must note here that the International Monetary Fund (IMF) too expected around a third of the global economy to enter recession in 2022 or 2023; it also cut its forecast of global GDP for the year to 2.7 percent.

Businesses may have to deal with the "triple challenge" of continued high prices of key inputs, tightening monetary policy, and weakening demand, right at the start of 2023.

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Further, nine out of 10 economists surveyed expect weak demand to exert a “significant drag on business activity this year”; eight-seven percent expect the same from elevated borrowing costs; over 60 percent expect the same from higher input costs.

Energy prices will be a key factor, especially in Europe, threatening not only the competitiveness of producers from the region but also diverting business activity away from Europe.

Some other potential economic headwinds that could threaten the virility of businesses this year include talent shortages. As many as 45 percent of respondents believed it is "somewhat or extremely likely" to exert a drag on business activity.

Some respondents, namely 36 percent, also expect regulatory and policy uncertainty to adversely affect business activity; 23 percent said supply chain disruptions may also have a significant impact on the same.

However, the chief economists surveyed believe there is still room for optimism, the WEF said. For instance, they said they had expected “the outcomes of the latest shocks to have been worse, the impending downturn to be relatively short-lived and the current resilience to form a cornerstone of future recovery”.

Explaining how to navigate the potential challenges, Erik R Peterson, Partner and Managing Director, Global Business Policy Council, Kearney, said: “Business leaders have been focused on prospects for growth (or lack thereof), inflation, labour markets and the uncertain global economic outlook for quite a while. In my view, while remaining vigilant to unexpected short-term changes, they should already be looking beyond 2023 (as turbulent as it is likely to be) and positioning themselves for the time when governments and central banks turn to stimulate their economies."

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He added: “My view is that recovery will begin in 2024, that the rate of recovery will be highly uneven across geographies and stages of development, that economic policymakers will be progressively constrained when it comes to the use of traditional fiscal and monetary tools and that additional downside contingencies could slow things down.”

Fernando Honorato Barbosa, Chief Economist, Banco Bradesco, said: “Businesses will face a completely different economic environment from now on. We have not seen such a combination in decades: high rates; geopolitical uncertainties; energy insecurity; and, the need to rethink the global supply chains. Amid that, there is a need to innovate, protect the environment, become more inclusive and reskill the labour force. No CEO has the roadmap to address these challenges in a smooth and predictable way. They will have to take larger risks and, as usual, face the burden of their decisions.”

The long-term sustainability of businesses will depend on multidimensional factors, he said and added that taking care of cash positions will just be the starting point, it won’t be enough to grant the survival of a company. “The risk of de-globalization and acting to fulfil only the company’s own interests is real, but that is not in the best interest of society. Easier said than done, but true leaders will be called into action like no other time in the past,” Barbosa added.

Ira Kalish, Chief Global Economist, Deloitte Touche Tohmatsu, said: “The global economy will slow down considerably in 2023 with a moderate to a deep recession in Europe, a modest recession or downturn in the US and historically slow growth in China. Inflation in North America will recede quickly. Inflation will decline in Europe but at a slower pace. Labour markets are likely to remain tight even as economies slow. This will be driven by demographics, persistent COVID-19, lower labour force participation and much-reduced migration. Geopolitical trends will remain uncertain, thereby compelling companies to focus more on supply chain resilience and redundancy.”

Kalish suggested businesses prepare for recovery, adding “A recession might last nine months, but a recovery could last nine years”.

At the upcoming annual WEF meeting in Davos, the forum expects to discuss some more pertinent issues related to the predictions for the year ahead, such as – “In a world of 'polycrisis', how can companies pivot to resilience, while staying profitable and sustainable?” and “Almost two-thirds of economists surveyed by the World Economic Forum expect there will be a recession in 2023. So, what does that mean for businesses?”