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Cautious CEOs counting on BRICs for growth

Rising inflation and its impact on the fast-growing developing world are major risks to the economic recovery this year, CEOs gathering for the annual Davos meeting said today.

business Updated: Jan 26, 2011 17:39 IST

Rising inflation and its impact on the fast-growing developing world are major risks to the economic recovery this year, CEOs gathering for the annual Davos meeting said on Wednesday.

Business leaders said rising food prices could spark fresh social unrest and pointed to worries over tensions between North and South Korea and Iran and Israel.

"Interest rates are zero today but they can only go up and higher interest rates will drive financing costs up as well," John Krenicki, chairman and chief executive of GE Energy and vice chairman of GE told Reuters.

"It's not just inflation in energy but steel, cooper and general commodities."

A PricewaterhouseCoopers survey on the eve of the World Economic Forum showed optimism among chief executives has bounced back to almost the same level as before the financial crisis.

But CEOs at the event struck a more cautious tone, pointing to the numerous risks which could yet derail the fragile global recovery.

The four-day Forum in the Swiss Alps brings together at least 35 national leaders, including the presidents of Russia and France, and over 1,400 business chiefs.

Bankers are keen to show their industry emerging successfully from the wreckage of the global financial crisis and politicians want to dispel the gloom hanging over the euro zone. Both will emphasise how important rapid growth in developing countries is to the global recovery.

"This year, we think we'll see ... western Europe continuing to be tepid, America more U-shaped and the fast-growing emerging markets will continue to be V-shaped," Martin Sorrell, chief executive of advertising group WPP, told the opening session.

Entrenched
Resurgent inflation is stalking the emerging markets on which world business is pinning its hopes for growth.

Reports in China on Wednesday suggested new bank lending has surged in January, defying state efforts to restrain it.

India raised interest rates on Tuesday, warning that higher food prices could become entrenched if steps to boost output are not taken..

Nor is the threat confined to the emerging world. Euro zone inflation exceeded the European Central Bank's two percent target for the first time in two years last month and Bank of England Governor Mervyn King warned on Tuesday that UK inflation could hit five percent soon.

Sorrell put global economies into four divisions: The BRICS -- Brazil, Russia, India and China -- in the top category, followed by the United States and Germany, then Western Europe and Japan last.

"Net-net I think corporates are still uncertain," he added.

"Our business grew last year interestingly because of that uncertainty: an unwillingness in the West to invest in capacity, in increasing fixed cost. Boards are terrified of making mistakes."

Russian group Vimpelcom's chief executive Alexander Izosimov, who is bidding for control of Egypt's Orascom Telecom , said he was well aware of the risks in the Middle East after recent turmoil in Tunisia and Egypt.

"As you go into emerging markets, it's not unfortunately only growth and high returns, sometimes you have to deal with
the risks," he told Reuters Insider.

"We've seen those situations in our existing territories in the CIS and I hope that it goes in waves and the environment will stabilise."

The meeting's official theme "Shared Norms for the New Reality" reflects a desire to ensure that the new big players on the global stage share the values of the existing major powers.

BRICS
Russian President Dmitry Medvedev, who delayed his departure for Davos after a suicide bombing on Monday killed at least 35 people at Russia's busiest airport, delivers the opening speech on Wednesday.

With emerging economies accounting for almost 40 percent of global consumption, a slowdown in these economies "would deal a serious blow to the global recovery", the IMF said in an updated World Economic Outlook released on Tuesday.

Europe's festering debt crisis is another threat not just for policymakers but also for otherwise chipper CEOs.
"It's an uncertainty that is out there and it could potentially stifle the recovery efforts," said PwC Chairman Dennis Nally.

John Evans, general secretary of the Paris-based Trade Union Advisory Committee, sees a worrying disconnect.

"There has to be a reconnect between the booming financial sector and the confidence which is coming back in terms of profits," he told Reuters Insider television.

"The fragility in Europe is a sign that it is not being translated into jobs. There is a gap between financial markets and real economy and that has to be bridged."

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