This month, Suzanne Clark, head of America’s mighty Chamber of Commerce, has been grilling her members about what they anticipate when contemplating the outlook for 2023.
You might expect this prognosis to be grim. A JPMorgan survey of American business leaders last week reported “a sharp fall in optimism about the economy as recession fears loom”, with 65 per cent of executives predicting a downturn in 2023, and just 8 per cent feeling upbeat about the global economy.
And when the World Economic Forum issued its annual risk report before next week’s annual jamboree in Davos, it was apocalyptic, noting that “as an economic era ends, the next will bring more risks of stagnation, divergence and distress”. Ouch.
But there is a peculiar paradox at play: if you scour that JPMorgan report, you can see plenty of micro-level cheer amid the macro malaise. Most notably, 51 per cent of respondents predicted that profits would rise — not fall — in 2023, and 88 per cent of them expect to keep or add staff.
A cynic might say this is because CEOs have to be optimistic in the face of investors. However, Clark believes the scale of the dichotomy, also reflected in the chamber’s own data, is unusual. “Right now, many of our members tell us that while the state of their business is strong, the state of our economy is fragile,” she says. Clark dubs this a problem of “second-hand pessimism” — or the place where corporate reality and public rhetoric diverge.
Why has this second-hand pessimism developed? The chamber, in its role as a lobbying group, primarily blames it on America’s politicians. “American business is fed up [with Washington] . . . due to its polarisation, the gridlock, the over-reach, and the inability to act smartly and strategically,” says Clark, lamenting that “businesses don’t have the clarity or the certainty to plan past the next political cycle”.
Fair point. But I think this only tells part of the tale. The other reason for this dichotomy is that the C-suite is contending with a baffling world that most are ill-equipped to analyse.
This is partly because the challenges that confront businesses right now cannot be easily defined by the intellectual tools that have long been venerated in business schools, such as economic models or balance sheets.
To understand this, just look at the Davos risk report, which cites the top 10 dangers that alarm WEF members. A decade ago, these often related to economic problems, such as growth and debt. However this year, such traditional economic issues do not appear in the list at all. Instead they have been displaced by risks such as nuclear war, intensifying alarm about climate change and social conflict.
This might be misguided; debt, for example, could still be a serious problem in 2023. But wrong or not, the key point is that “few of this generation’s business leaders and public policymakers have experienced” these big risks, as the WEF makes clear. No wonder that only 8 per cent of respondents in the JPMorgan survey feel cheerful about the global economy.
To make matters worse, the big economic issue that is shaping the world — a swing in the financial cycle — is also unfolding in unusual ways. Most business leaders today have lived through various dramatic financial cycle swings, whether the great financial crisis of 2008, 2001’s dotcom implosion or the Asian crisis in 1997.
But today’s swing is different. As central banks tighten monetary conditions, this has not caused asset price bubbles to “pop” rapidly in the way we saw in 2008 or 2001. Instead, most asset prices are sliding down steadily, in a manner reminiscent of the slow “hiss” created when air leaks from a balloon.
This is partly because of continued uncertainty about whether central banks, including the US Federal Reserve, are truly committed to this tightening. But another key issue is that private capital played a central role in the last bubble, to a far greater degree than in earlier cycles.
Since private institutions do not need to mark down depreciating assets in a timely manner, many are still shuffling these around, at inflated marks, while hoping — or praying — that a miracle will rescue them. The consequence of tighter monetary policy is thus still partly concealed or, more accurately, deferred.
For politicians, a “hiss” undoubtedly looks preferable to a “pop”. But the problem (as we saw in Japan in the 1990s) is that a world of deferred losses and rising rates is also one of gnawing executive anxiety. To cite one example: the chamber data show that while companies say they can easily access capital now, they assume it will soon evaporate. This is both second-hand and pre-emptive pessimism.
So the big questions that investors need to ponder is whether this bifurcation will last — and how it might end. Will micro-level cheer eventually drown out the macro gloom? Or will this pessimism become self-fulfilling, as angst about the future continues to crush C-suite optimism?
My own suspicion is that the second scenario is more likely. But I fervently hope I am wrong. Either way, Davos attendees (and the American Chamber) face a business cycle unlike any they have known before; and one that cannot be neatly forecast with economic models alone.