Economy

DAVOS, Switzerland (Reuters) – Business leaders in Davos say they are increasingly turning to scenario planning to safeguard supply chains and lessen the potential hit from unexpected geopolitical crises.Many CEOs and executives told Reuters they foresee an upbeat U.S. economy in 2024, but are concerned about China and Europe, and the impact of unexpected global shocks on inflation.The World Economic Forum (WEF) this year took place against the backdrop of conflicts in the Middle East and Ukraine, as well as impending elections in dozens of countries. “Just when governments and companies get their arms around how to deal with one flare-up, another emerges,” said David Garfield, Global Head of Industries, adding a big issue at board level and executive leadership level is scenario planning.”Sophisticated companies are saying: ‘What happens if raw materials for critical production cuts off?” Garfield added. With supply chain disruptions caused by the pandemic barely in their rear-view mirrors, CEOs are now grappling with the impact of Houthi militant attacks in the Red Sea.Many described the global situation as unusually worrisome. “In terms of scenario planning, the last few years has upped the ante,” said Ishaan Seth, Senior Partner at global consulting group McKinsey. “It is not about forecasting the future but it is about having a perspective on how the world may play out. The key is: How do you pivot an organization quickly?”An Alix Partners survey showed 68% of CEOs report U.S.-China tensions are causing them to adjust their strategy, while 66% worry about the U.S. presidential election. “The (board level) concerns are geopolitics and elections around the world,” said BCG Global Chair Rich Lesser. “When there is so much uncertainty, CEOs and boards ask ‘What can I do to be better prepared,'” he added.Some have been looking to diversify supply chains.”Every Japanese company is seriously considering (changing) the origins of over reliance – it is so risky,” Takeshi Niinami, CEO of Suntory, Japan’s second-biggest domestic drinks group, told the Reuters Global Markets Forum. “So we like to move to, for example, India or some other countries like Vietnam, but it can’t be done overnight.” ABB (ST:ABB) Chairman Peter Voser said geopolitical risks, including China and Taiwan, were part of boardroom scenario planning.”One takes steps to deal with it on a day-to-day basis, but also as a Plan B or C depending on what is going to happen,” said Voser, adding: “There should be no board in the world who takes this very lightly at this stage.”INFLATION Some bankers and CEOs were concerned about the potential for supply chain dislocations to reignite inflation. Most were upbeat about the U.S., but concerned about Europe and China.”I will be cautiously optimistic,” said Srini Pallia, an executive at technology services and consulting company Wipro (NYSE:WIT), adding: “People expected U.S. to be in recession, now it’s a soft landing.”The WEF meeting came as the global economy shows mediocre growth, while central banks hold interest rates high.”Clients are cautiously optimistic. We are getting back to more of a normal environment. There is slower growth but sustainable growth,” Bank of America’s Chief Financial Officer Alastair Borthwick said.The International Monetary Fund in October forecast that global GDP growth in 2024 would be 2.9%, a dip from 2023’s 3%. It cut its 2024 growth forecast for China, which has been hit by a property crisis, to 4.2% and the Euro area to 1.2%, but raised its U.S. forecast to 1.5%.Goldman Sachs CEO David Solomon expects the U.S. to avoid a big slowdown this year, but warned that inflation could remain more stubborn than expected and weigh on growth. “I still think there’s a risk, particularly around labor, food, gas, that inflation could be stickier than people expect,” Solomon told Reuters.Many doubted that the U.S. Federal Reserve will cut interest rates as rapidly as markets forecast. The Fed is gauging whether inflation is headed firmly enough back to its 2% target to cut.After 525 basis points of hikes since March 2022, the U.S. rate futures market has priced a rate cut as early as at the Fed’s March policy meeting.CEOs said they had hopes the economy would be resilient.”We are slightly optimistic about the coming 18-24 months that economies can turn, interest rates can come down,” Jesper Brodin, CEO at IKEA-owner Ingka Group.But some sectors are challenged. Aggressive rate hikes, combined with reduced office space demand after the pandemic, have hit commercial real estate in particular.”I talk to people who say, this is the worst time ever,” said JLL CEO Christian Ulbrich. “And my next meeting could be with somebody who says, this is the best time ever – we will see some of our best deals ever over the next 12 to 24 months.”The mood was uneven, with Europe lagging on growth. Siemens sees some markets in the euro zone slowing, said executive board member Matthias Rebellius.”As a global company, we can balance this, but from a local perspective, there’s always I would say higher positive notion on Asia and on Americas,” he added.(Join GMF, a chat room hosted on LSEG Messenger, for live interviews: https://lseg.group/3TN7SHH) More

DAVOS, Switzerland (Reuters) – Business leaders and financiers in Davos this week said they are preparing for “high for longer” borrowing costs, despite markets betting on large-scale interest rate cuts this year.Jose Minaya, CEO of global investment manager Nuveen, which manages $1 trillion in assets said markets were “likely overestimating” the extent of rate cuts by central banks and investors need to prepare for a different environment.”The next ten years are likely going to have lower returns than the previous ten years, you haven’t seen inflation in almost two decades,” he told the Reuters Global Markets Forum.The U.S. Federal Reserve is gauging whether inflation is sustainably back at its 2% target in order to lower interest rates, after 525 basis points of hikes since March 2022.AlixPartners CEO Simon Freakley said executives globally are “hoping for the best but preparing for the worst,” as company boards plan for a high-for-longer scenario, while hoping rates will come down at least towards the end of the year.The discussion within boardrooms was around having to manage increased interest costs than previously thought and having to accommodate that within their plans and budgets, Freakley said.”Rates will be slow to come down, and it’s partly because international central banks were slow in taking them up,” said Nicolai Tangen, CEO of Norges Bank Investment Management.”You don’t want to come back to some kind of 70s situation,” said Tangen, who leads the world’s largest sovereign wealth fund with $1.5 trillion in assets, referring to sustained hyperinflation in the 1970s.U.S. rate-futures contracts are now pricing in a year-end policy rate of around 3.88% from the Fed’s current 5.25% to 5.50% target range, and expecting rate cuts to begin in March.”March is a very realistic starting point,” said Jan Hatzius, chief economist and head of global investment research at Goldman Sachs, who forecasts five U.S. cuts for 2024.Nevertheless, some doubt the U.S. central bank will cut interest rates as rapidly as markets are forecasting.”My personal view is that there’s a better than 50% chance that the Fed doesn’t cut rates this year,” Minaya said.Barclays CEO C.S. Venkatakrishnan said in Davos he saw “maybe one” U.S. interest rate cut by year-end.”I don’t expect it to turn on a dime. I think if you look at the questions which we were asking ourselves a year ago or two years ago, they’re very different from the questions we ask ourselves now,” he told a Wall Street Journal event at Davos.(Join GMF, a chat room hosted on LSEG Messenger, for live interviews: ) More

MADRID (Reuters) -Spain received a record number of foreign tourists in 2023, 17% more than the year before and up 1% from the 84 million who came in the pre-pandemic year of 2019, and Tourism Minister Jordi Hereu said on Friday he expected a further increase this year.The United Nations’ World Tourism Organisation said earlier on Friday that global tourism may only fully recover from the pandemic in 2024.International visitors spent 108 billion euros ($117.5 billion) last year in Spain, one of the world’s most visited countries, up 17% from 2019. “All in all, 2023 has been a very positive year and a record year … we are still on the same path to prosperity,” Hereu told a news conference, predicting 23.2 million foreign visitors in the first quarter, 11% more than a year ago, with destination spending likely to increase by more than 18%.He did not provide a specific forecast for the whole year, but expected a record number of new arrivals, adding though that Spain had to “fight for tourists from other continents”.”We have a lot of work to do in Brazil, in China, in the United States,” the minister said.He acknowledged also that the country needed better rules for tourist accommodation so as not to disrupt the locals’ way of living and to regulate the growing supply of holiday homes that compete with hotels.”We have to govern tourism. The whole tourist offer must be regulated and a sustainable mix must be achieved in each area,” he added.Industry group Exceltur on Tuesday estimated revenues from tourism activity in Spain would surpass 200 billion euros for the first time this year, 8.6% more than in 2023 at current prices, despite uncertainties over the wars in Ukraine and Gaza and over global inflation.Tourism’s contribution to gross domestic product should rise to 13.4% in 2024 from 12.8% in 2023, it said, expecting Spain to attract more tourists than its rivals in the eastern Mediterranean, such as Egypt, which are closer to the Gaza conflict.($1 = 0.9194 euros) More

COLOMBO (Reuters) – The International Monetary Fund said it remains critical for Sri Lanka to swiftly reach final agreements with its official lenders and reach a deal with external private creditors, after concluding a staff visit to the island nation on Friday.Having received a $2.9 billion bailout loan agreement from the Fund, the South Asian country is on the path to recovery from its worst financial crisis in seven decades, it said.”The economic reform program implemented by the Sri Lankan authorities is yielding the first signs of recovery,” IMF said in a statement. “However, challenges remain as these improvements need to translate into improved living conditions for Sri Lanka’s people.”At the beginning of the year, Sri Lanka had to raise its value-added tax (VAT) to 18% from 15% to meet revenue targets set under the four-year IMF programme.The IMF said swift progress towards the introduction of a progressive property tax is also key to ensuring fair burden sharing while sustaining the revenue-based consolidation.It added that tax policy measures need to be accompanied by strengthening administration, removing exemptions, and actively eliminating tax evasion to make the reforms more sustainable and further build confidence among creditors to support Sri Lanka’s efforts to regain debt sustainability.”A swift completion of final agreements with official creditors and reaching a resolution with external private creditors remain critical,” Peter Breuer, IMF’s senior mission chief in Sri Lanka, added.Sri Lanka also needs to work on converting ongoing negotiations with bondholders into in-principle agreements and completing the process ahead of the second review which will be held in spring, Breuer said.In November, a group of creditors holding Sri Lanka’s international bonds had said that while they welcomed the country’s debt restructuring agreement with its official creditors, the lack of transparency on deals struck so far was regrettable.The IMF said in a statement that it will formally assess Sri Lanka’s progress against the set parameters at the second review.Separately, Breuer said good governance in fiscal policy is important for the continued recovery of the economy and added that the government would release its action plan on the same in February.The IMF said Sri Lanka needs to keep pursuing reforms.”Staying the course on the reform agenda is necessary for this stabilisation to evolve into broad-based and stable growth that will ensure a full and lasting economic recovery benefiting the people,” it said in its statement. More

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U.K. retail sales volumes fell by 3.2% in December, after a poll by Reuters suggested an expected drop of just 0.5%.
The reading “increases the chances the economy may have ended 2023 in the mildest of mild recessions,” said Alex Kerr, assistant economist at Capital Economics.

Shoppers walk past shops on Regent Street on the final weekday before Christmas in London on December 22, 2023.
Henry Nicholls | Afp | Getty Images

U.K. retail sales dropped significantly more than expected in December, in a sign that the economy may have entered a shallow recession in the second half of 2023.
The Office for National Statistics said sales volumes fell by 3.2% during the key trading month, after a 1.4% rise in November. Economists polled by Reuters had expected a fall of just 0.5%.

December marked the largest monthly decline since January 2021, when strict pandemic lockdown measures dampened demand. The ONS said people appeared to have done their Christmas shopping earlier than in previous years.
Volumes were 0.9% lower in the three months to December 2023, compared with the previous quarter.
It comes after U.K. gross domestic product for the third quarter was revised down to a 0.1% contraction, from a prior reading of no growth.
“Today’s release would subtract around 0.15 percentage points from real GDP growth in December, which increases the chances the economy may have ended 2023 in the mildest of mild recessions,” said Alex Kerr, assistant economist at Capital Economics.
Looking to the year ahead, Kerr said that the impact of higher interest rates on mortgage holders may lead to a further “modest decline” in real consumer spending in the first quarter. He added that the expected interest rate cuts from June and a fall in inflation would support a recovery in the second half of the year.

Trade body British Retail Consortium said that the figures “capped a difficult year for retailers” and showed that Black Friday sales ate into Christmas spending.

The December decline was sharpest in the retail of non-food items, which was down 3.9% after recording 2.7% growth in November. Food store sales were lower by 3.1%, following a 1.1% increase in the previous month.
Online sales showed slightly more resilience, dropping by 1.7% in December — bringing the share of online vs bricks and mortar sales rose from 26.6% to 27.1%.
A combination of poor December weather and Black Friday events likely contributed to the “torrid end” of the retail year, said James Smith, developed markets economist at ING, in a note.
He added, “In reality, the consumer backdrop is starting to improve and that’s hard to square with the scale of December’s decline. We suspect much of the loss will be recovered in January/February.”
A solid outlook for real wage growth, inflation declines and slightly higher consumer confidence will all support the recovery, he said. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.China has called on “all relevant parties” to “ensure the safety of navigation in the Red Sea” as analysts warned that Houthi rebels’ attacks on commercial ships threaten the world’s second-largest economy.Beijing’s call for action to protect the global trade route came as the US is believed to have reached out to China over whether it can apply pressure on Iran, which backs the Yemen-based Houthis. China has warm relations with Tehran.But China’s Ministry of Commerce stopped short of signalling diplomatic or military assistance to defuse the crisis in the waterway.“The Red Sea is an important international trade route,” a ministry spokesperson said on Thursday, adding that China would “strengthen co-ordination with relevant departments, closely follow the developments and provide timely support and assistance to foreign trade enterprises”.The US and the UK have launched a series of strikes over the past week against the Houthis, who have vowed to continue their campaign in response to Israel’s invasion of Gaza.Beijing, which has invested heavily in building close ties in the Middle East and backs the Palestinian cause in the Gaza conflict, has publicly been neutral on the Houthi attacks.But Iran’s support of the Houthis has presented a test for China’s relations in the region, analysts said. China imports about half of its crude oil from Iran and other countries in the Middle East, and much of its trade with the EU, its second-biggest trading partner, also passes through the Red Sea.Beijing last year brokered a rapprochement between Iran and Saudi Arabia, a feat Chinese officials applauded as evidence of the country’s successful diplomacy. Yin Gang, a Chinese Middle East affairs expert, said that although Houthi forces had not attacked Chinese merchant vessels, the disruption had raised shipping costs and caused “huge losses” for Chinese companies.“The Red Sea shipping route is of great importance to Chinese merchant ships,” Yin said. “Although shipments from countries like China might be safe, the freight costs have increased . . . it’s a very bad thing for China.”The Shanghai Containerized Freight index last week rose to the highest level since September 2022, reflecting the increased costs of rerouting vessels around the Cape of Good Hope in Africa.China’s largest shipping company, state-owned Cosco, has been forced to reroute cargo away from the region, said Stefan Angrick, associate director and senior economist at Moody’s Analytics, raising the costs for exporters and causing delays. “At a time when the economy at home isn’t looking like it’s in great shape, I think it’s fair to say that is an unwelcome headwind,” Angrick said. He added that European high-tech suppliers to Asia would also be disrupted, raising risks for supply chains that were finally recovering after the coronavirus pandemic and Russia’s invasion of Ukraine.Analysts warned that China would probably not intervene directly through military operations or by putting pressure on Iran, and preferred to make general statements about the importance of international maritime channels.“Iran backs the Houthis, so China won’t deal directly with Iran on this issue,” Yin said.China’s People’s Liberation Army has a naval base in Djibouti, at the mouth of the Red Sea, but analysts said it would run against Beijing’s diplomacy in the region to participate in any military action against the Houthis or back US policy, which it sees as a failure.“Except in matters related directly to sovereignty and UN peacekeeping operations, China has made it clear as a matter of principle it’s going to avoid engaging in military conflict whenever possible,” said Josef Gregory Mahoney, professor of politics and international relations at East China Normal University.Additional reporting by Wenjie Ding in Beijing More

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