After a challenging time for business last year, the first half of 2023 looks unlikely to offer much respite, with inflation remaining high, global growth slowing and geopolitical concerns elevated.
But most economists see rays of light emerging in the second half of the year. Assuming central banks can bring inflation back under control, interest rates should stop rising in the early part of the year in Europe and the UK.
Tensions between the US and China are compelling companies to reorient supply chains
Borrowing costs could even start to decline in the US later in 2023. Asia has not experienced the same rises in inflation, but a significant slowdown in growth in China is causing some concern.
There are hopeful signs for CFOs that the second half of 2023 will be a period of turnaround for the global economy and corporate profits.
Expectations that inflation would fade swiftly as pandemic restrictions were lifted proved premature in 2022. Indeed, prices rose at the fastest pace in decades in much of the developed world – driven in part by higher energy and food prices following Russia’s invasion of Ukraine.
Consumer price inflation topped 10% in both the UK and the Eurozone late in the year. US inflation reached its highest level in 40 years in the summer and was showing only early signs of declining by the end of 2022.
But economists believe that the turning point is near. Most top central banks have been raising rates rapidly to curb inflation, with the US Federal Reserve hiking by 450 basis points, the most since the 1980s.
Their success in bringing inflation under control will be critical to businesses, which have been dealing with a swift increase in input costs. This has threatened to erode profit margins. In particular, CFOs in the US and Europe will want to see evidence that wage rises – the largest expense for many businesses – are coming under control. In late 2022, Bank of England governor Andrew Bailey said that UK pay awards, at around 6.5%, were ‘well above where you’d expect in any normal situation’.
How deep a recession?
Many economists believe that several leading economies – including the UK and Eurozone – had already entered a recession in late 2022. The picture in the US has so far been more mixed, with signs that higher interest rates are slowing activity in the housing market, but that jobs growth remains strong and service sector activity is surprisingly robust.
However, the lagged effect of prior rate rises from the Federal Reserve is widely expected to slow US economic growth to a crawl in 2023, or even cause a contraction. With China still combatting Covid infections, few economists see bright spots for global growth at least in the first half of the year.
Geopolitics also remains a risk, as the war in Ukraine rumbles on. Companies, especially in Europe, will continue to be forced to source gas and oil from elsewhere in the world – a formidable logistical challenge.
Most economists expect a turning point later in the year. The Federal Reserve will be able to start cutting rates
Tensions between the US and China are also compelling some companies to reorient supply chains to avoid potential restrictions, especially in areas like semiconductors.
Costs up, growth down
Taking everything into account, the first six months of 2023 look likely to be challenging, with input costs still rising amid slowing growth.
‘In view of the economic contraction, corporate earnings growth is likely to be negative in the first two quarters of 2023, and such an earnings recession may well continue to depress share prices in the months ahead,’ according to ABN AMRO MeesPierson’s Ralph Wessels, chief investment strategist.
The early part of the year is shaping up then to be a tough time to raise capital for new projects, either in the stock market or the bond market. But there is light at the end of the tunnel. Most economists expect a turning point later in the year. Futures markets are implying that the Federal Reserve will be able to start cutting rates slowly by the middle of the year.
The drive to curb carbon emissions was the key sustainability focus in 2022, with the COP27 climate summit in Egypt failing to produce an agreement to phase out fossil fuels. With COP28 only starting on 30 November 2023, finance leaders will be looking for guidance from governments through the year on upcoming regulations or subsidies that might affect their businesses.
CFOs will also be looking to the implementation of previous sustainability packages that stand to benefit companies in green generation and energy efficiency, including the US$370bn US Inflation Reduction Act and the EU’s €300bn REPowerEU.
CFOs say hiring and retaining staff will be the most difficult task over the coming year
In addition, executives will be watching the potential legal challenge to the US green spending package, which the EU has claimed is anti-competitive by directing subsidies to US businesses. US president Biden has said it might be possible to tweak the package to address these concerns, which would be welcomed by non-US businesses.
Along with climate commitment, corporate decisions are likely to be increasingly scrutinised in 2023 on the issue of biodiversity. This was the focus of the COP15 in late 2022, which aimed to redirect US$500bn in agricultural subsidies with the potential to damage eco-systems.
This drive is likely to have implications for businesses involved in related sectors, especially those with the potential to limit land use, such as vertical farming.
A formidable range of challenges are facing finance executives. But a poll by Gartner of 234 CFOs found that more than half considered hiring and retaining staff as the most difficult task to manage over the coming 12 months – a greater share than for any other single preoccupation.
‘The data from CFOs align with what we are hearing from HR leaders, namely that competition for talent is expected to become fiercer over the medium term, and retaining that talent will become more challenging,’ says Marko Horvat, vice president, research, in the Gartner Finance practice.
‘CFOs will need to deploy a variety of strategies to ensure critical roles remain filled, while also protecting margins.’
Employers are increasingly recognising that rising remuneration alone may not be sufficient to solve the talent challenge. They are also acknowledging the desire for greater flexibility among key employees, and most have stepped up digital investments to make remote working easier and more productive.
So all in all it looks like being a mixed year ahead. Priority number one for businesses will be weathering the next six months, then all eyes will be on a much hoped for turnaround.