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Last Updated: Tuesday, 22 January 2008, 23:28 GMT
US rate cut stuns Davos leaders
By Tim Weber
Business editor, BBC News website, Davos

Workers preparing a stage at the World Economic Forum
The stage is set for intense economic debates in Davos

The US Federal Reserve's unexpected rate cut has stunned the movers and shakers assembling in Davos for the World Economic Forum.

It was the hottest topic here during the first briefings and welcome receptions on Tuesday evening.

Many had heard the news while they were stuck in trains, buses or automobiles, slowly winding their way up to this snow-covered Swiss mountain valley.

As executives and economists debated the implications, many dared using the dreaded "r" word - recession.

But this was not a wholly pessimistic crowd.

"There are a lot of positive voices here," said Kevin Kelly, chief executive of global headhunting firm Heidrick & Struggles.

He believes the Fed's action was "long overdue".

"They had to act now, they could not have waited until their next scheduled rate meeting," said Mr Kelly.

But would there be a recession?

"In some ways it's already happened," he said. "The question is will it be long and shallow or short and deep?"

'The skies have darkened'

Sam DiPiazza, global chief executive of PricewaterhouseCoopers (PwC), believes that a recession can be avoided.

Very rarely does the whole world go into a recession
Jeff Clarke
chief executive, Travelport

The United States was going through a downturn, but would not suffer a recession, predicted Mr DiPiazza - at least not in the technical sense of the word, where a recession is defined as two consecutive quarters during which the economy shrinks.

"It's quite hard seeing the US [in that situation]," he said, but admitted that the past 30 days had "given us some reason to pause... the skies have darkened".

"I think the Fed is simply reacting to a very loud voice in the markets, and it is using the one tool it has - interest rates," said Mr DiPiazza.

But while the short-term outlook might be bleak - two-thirds of US bosses are dubious about their company's prospects during the next 12 months - over a three year horizon corporate confidence was back to normal, said Mr DiPiazza.

Robust demand in developing markets had provided the global economy with a "cushion", he said. "The question is how long will this cushion last?"

Recovery in June?

George Colony, chief executive of technology research firm Forrester, is convinced the recession has already arrived.

barbed wire in front of Davos sign
Snow has blanketed Davos, and security is tight

"If you look at the [US small company index] Russell 2000, it's off its peak by 20%, that's a clear indicator of a recession," he argued.

But this recession was sector specific, hitting mainly the financial services industry, said Mr Colony.

Technology companies, in contrast, were still growing - albeit at a steady rate.

And Mr Colony believes the recession will be short, with a recovery as early as this summer.

Strong growth in Asia

Jeff Clarke, chief executive and president of global travel firm Travelport, called the rate cut a "quite decisive move", which "clearly has stemmed the fall" on stock markets around the world.

"Lowering the cost of money is a good thing for corporations," said Mr Clarke.

He believes that companies like his will be largely unaffected by the economic downturn.

Travelport owns the travel reservation networks Galileo and Worldspan, and the consumer travel website Orbitz. His firm is paid per transaction, and during an economic downturn airlines and hotel chains will cut prices to keep filling seats and beds.

Furthermore, while his company already sees that business in the United States and Western Europe is weakening, demand is growing strongly in Asia and the Middle East.

"Very rarely does the whole world go into a recession," said Mr Clarke.

Mr Clarke's observation is backed up by a global survey of chief executives. Compiled by PwC during the last three months of 2007, the poll suggests a "tale of two worlds", with business confidence slumping in developed economies like the United States and many European countries.

Across the world, bosses say that a global recession is currently the biggest threat for their companies.

But according to the survey, chief executives in countries like Russia, India and China are still very confident that their companies are set for growth.

"I don't see the emerging economies talking themselves into a recession," says Mr Clarke.



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