DAVOS, Switzerland — Finance and technology CEOs gathered at the World Economic Forum this week voiced measured optimism about the economy in 2023 — but at least one major risk looms over markets, they said.
The robust US economy, a mild European winter and the reopening of China have given investors and forecasters hope that a deep recession can be avoided. Citigroup CEO Jane Fraser told CNBC’s Sara Eisen on Tuesday.
“All in all, the year started better than everyone expected,” Fraser said. “Everyone is now more converging in the States around a mild, manageable recession scenario, driven by the strength we have in the labor markets.”
The US economy has slowed since the US Federal Reserve began raising interest rates last year, fueling fears a recession was inevitable.
In the early weeks of 2023, investors began to hope that slowing inflation and strong payrolls could lead to a so-called soft landing. But the burgeoning optimism at the annual gathering of billionaires, heads of state and business leaders in the Swiss Alps collided with a new threat, adding to existing concerns like the Ukraine war and global climate change.
The world’s largest economy risks defaulting on its debt for the first time in modern history this summer as politicians bicker over raising the country’s debt ceiling, currently capped at $31.4 trillion. The US is likely to hit its debt ceiling on Thursday, Treasury Secretary Janet Yellen said last week. After that, until at least early June, the Treasury Department will find ways to fund its debt obligations, Yellen said.
This leads to a stalemate in Congress in the coming weeks. Republicans and Democrats will speculate on political goals. The last time potential default risk arose was in 2011, when lawmakers averted disaster after markets shook and the US credit rating was downgraded.
“I don’t think anyone knows what would happen if they really went further than 2011,” the CEO of a Wall Street bank said on the sidelines of the conference. “That’s why it’s scary.”
The CEO, who openly declined to be named, said he had just met with a group of US lawmakers worried about the impasse.
“It would affect markets and weigh on economic activity due to uncertainty,” he said. “That would be really bad for us.”
But in a political environment that has become even more polarized over the past decade, reaching an agreement on raising the US debt limit will not be easy.
Addressing the debt ceiling “is going to be difficult,” he said Foreclosure CEO Marc Benioff on Wednesday. House Speaker Kevin McCarthy “has to deal with it, but he has a lot of problems,” he said.
The newly elected McCarthy is in a bind. While Conservative members of his faction insist they don’t want the country to default on its debt, McCarthy is under pressure to call for deep spending cuts. McCarthy has indicated he will not support raising the debt ceiling without making spending compromises.
The situation is a “mess” with at least one possible solution: Congress could pass a “clean debt limit,” according to Peter Orszag, CEO of leading financial advisory firm Lazard. This refers to increasing borrowing without cutting spending.
However, McCarthy probably wouldn’t survive as a public speaker if he agreed to do so, Orszag said.
Another top Wall Street CEO said he plans to urge lawmakers in Davos to focus more on spending cuts than the debt ceiling.
Concerns are contrasted this month with early signs that formerly frozen markets are beginning to wake up. For example, debt issuance has been “incredibly strong” so far in January, according to Fraser.
It’s too early to say whether these signs herald better times for investment banks and the broader economy, she said.
“We’re not over the hill yet,” Fraser said.
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