Postcard from Davos

• China’s pitch to international investors collides with keen focus on supply-line diversification
• General optimism at the WEF around economic prospects may understate the coming cost of further monetary tightening

The contrast between economists – generally pessimistic about the chances to avoid a recession in 2023 – and corporates’ often upbeat expectations was very tangible in Davos. The gap may have to do with the fact that the ongoing monetary policy tightening, in a context of macro resilience, has not had much of an impact so far, while the reopening of China is seen as a significant boost to prospects for global demand – the potentially inflationary impact via commodity prices is expected to come only later. But beyond the lifting of sanitary restrictions, what we found striking at the World Economic Forum was how Chinese officials – who had been absent at the 2022 edition – endeavoured to reassure international investors on Beijing’s commitment to a further strengthening of the private sector and protection of property rights. The question however is whether this effort is not coming too late. Indeed, the number of sessions dedicated to the diversification of supply lines – read “outside China” – was impressive.

The American “official sector” was discreet, with neither the US President, Vice President nor State Secretary making it to the Swiss alps. This may reflect quiet confidence in Washington DC. There was unanimous praise for the US new-found interest in industrial policy, epitomized by the IRA. Despite the return of political dysfunction in Congress, there was not much PR the US needed to engage in. By comparison, the Europeans  did not manage to present a united front. We will need to see if the Franco-German summit this weekend kick-starts more action.

Central bankers were popular in Davos. After some initial, unconfirmed dovish noises, the hawkish line held prominence, which gets us back to our first point. The tightening in monetary policy is not over. We’ve updated our index of financial conditions. Our concern is that, for the Fed to stop early, it needs to be able to argue that real interest rates will continue rising amid falling inflation even if nominal rates remain unchanged, providing “spontaneous” demand dampening. The fact that risk-free, ex ante real rates are already falling is not helping.