The outbreak of optimism at Davos

Uniformly bleak predictions have given way to greater cheer. But don’t count your chickens yet

Gita Gopinath
IMF deputy managing director Gita Gopinath provided a message of hope at Davos
(Image credit: Stefan Wermuth/Bloomberg via Getty Images)

After a series of grim surveys preceding the event, the two “surprise guests at Davos” last week were “hope and optimism”, said Aimee Donnellan on Reuters Breakingviews.

The IMF set the tone, when deputy managing director Gita Gopinath pronounced that China could see a sharp recovery in growth (“in the 4%-plus ballpark”) from the second quarter – and that any global inflationary pressures this might cause would likely be counterbalanced by the slowdown in demand elsewhere.

This balanced picture has prompted the Fund to upgrade its formerly dire global forecast to include a heartening “improvement” in the second half of the year, and into 2024.

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“Immaculate disinflation, a soft landing, the goldilocks economy – call it what you like, but 2023 has started with an unexpected injection of optimism,” said Mehreen Khan in The Times. Economists and business leaders are sounding “increasingly cheery about the chances of central banks engineering slower inflation without crashing their economies”.

One could be forgiven for dismissing “the bonhomie of private sector titans” – who, after all, were back in the Swiss Alps for the first time in three years. But plenty of well-respected forecasters not at Davos have also been adjusting their 2023 expectations.

“Even Britain, on course to be the worst-performing rich economy this year, will not suffer as deep a recession as feared,” according to JPMorgan and Credit Suisse. The Bank of England, which in November pencilled in “a four-quarter recession”, is likely to cement this tentative optimism by upgrading UK growth prospects in early February.

A ‘heaven versus a hell’?

The Czech industry minister, Jozef Síkela, described the difference in mood between now and last autumn as “like a heaven versus a hell”. That might be over-egging things, said Chris Giles in the FT, but three factors have raised hopes of a soft landing: an 80% fall in wholesale natural gas prices, the reopening of China’s economy and the big subsidies provided by the US Inflation Reduction Act for the green transition.

The potential “party poopers” are the central bankers, who, having underestimated inflation in 2022, are now doubling down on tightening. “Their worry is that while headline inflation rates are falling… core measures are not falling as fast.”

Pressure isn’t off

Even if the strain on households from surging inflation is past its peak, it doesn’t mean “the pressure is off”, said Roger Bootle in The Daily Telegraph. Real pay is still falling in Britain, and “the pressure on mortgage-burdened households is still growing”.

And December’s record borrowing figure was a fright. Things are a bit better than seemed likely just a short while ago. But don’t get too optimistic: “what the data gives, it can easily take away”.

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