Key Summary Findings: Talent Retention and Attraction, Digital Transformation, Automation, and Innovation Will Be Key to Emerge Stronger from the Current Crisis

• Top Concern. Recession fears fueled by volatility and geopolitical tensions top the list of external business concerns.

In line with their global peers, CEOs in Europe see economic downturn/recession, followed by inflation and global political instability as top factors to likely impact their business operations in 2023.

However, they also show noticeably higher levels of concern around energy price volatility and the war in Ukraine, ranking them 3rd (12th globally, 16th in the US) and 4th (15th globally, 22nd in the US), respectively.

On the other hand, COVID-19 related disruptions have evaporated as concern for 2023, ranked 24th – while it was the second-highest threat last year. CEOs in the US also hold a similar view, ranking it 18th, but not their counterparts in Asia. Given the research was done during China’s zero-COVID policy implementation, CEOs there see it as the single most important external stressor ranking it first, followed by economic downturn/recession.

Interestingly, higher borrowing costs ranked 17th by CEOs in Europe, significantly lower than that in the US (ranked 4th). The low ranking is likely due to a combination of the less aggressive monetary policy adopted by the European Central Bank – interest rate in the Euro Area is at 2 percent compared to 4.5 percent in the US or 3.5 percent in the United Kingdom- and businesses maintaining positive balance sheets post-pandemic.

• Growth Outlook. Europe’s outlook has turned pessimistic, but a short-lived and shallow recession appears more likely.

Almost 70 percent of CEOs in Europe see a growth turnaround at the end of 2023 onwards, conveying a particularly pessimistic assessment about the short-term outlook of the European economy. Although the region has likely entered into recession as of Q4 2022, we expect it to be mild and short-lived lasting only until Q1 2023. Supply disruptions easing, a robust labor market, strong fiscal support and favorable weather conditions helping until now the region to weather the energy crisis are all factors heralding a short and shallow recession.

Similar to Europe, the majority of CEOs in the US (82 percent) also expect the economy to rebound closer to the end of 2023 or mid-2024, while a third of CEOs in China see this happening beyond mid-2024. The Conference Board expects the US economy to stagnate in 2023, with real GDP growth slowing to 0.2 percent, due to a brief, yet shallow recession that is likely to start in Q1 2023. As for China, following its exit from zero COVID policy, the economy is projected to rebound in 2023, growing at an annual rate of 5.1 percent.

• Priorities Ahead. Attracting and retaining talent remains a top internal focus area, though it will not come without a cost.

Amid a very tight labor market, business leaders in Europe recognize the challenges behind attracting and retaining talent, ranking it as the number 1 internal stressor to focus on in 2023. One way to achieve this is to prepare for higher wages and benefit costs, a proposition also reflected in their responses. They view reevaluate employee compensation and benefits as a much more dire issue, ranked 8th, than their peers in the US (19th) or globally (16th). Pressures for wage increases across the continent have mounted in recent months as not only record-high inflation has dented Europeans’ real incomes but also because wage growth has remained quite subdued compared to other major regions.

Except attracting and retaining talent, driving revenue growth and accelerating the pace of digital transformation complete their list of top-3 internal focus areas in 2023. Remarkably, in contrast to the picture in previous crises, reducing costs does not appear on their top-5 list of internal stressors – a view in line with their US peers.

• How to Emerge from the Crisis. Innovation and digital transformation are key drivers to exit from the current economic slowdown.

When asked about their short-term plans to deal with the upcoming recession, CEOs in Europe see accelerating innovation and digital transformation as a top strategy to effectively navigate through current turbulent times, pretty consistent with the global view.

Their responses, however, also present considerable differences with other regions. Most importantly, CEOs in Europe rank delaying investments in capital equipment and structures much higher than their global peers (3rd versus 13th globally and 15th in the US or China). The finding is fully aligned with the results of our most recent Measure of CEO Confidence for Europe. Uncertainty around the outcome of the war, the energy market outlook and the evolution of inflationary pressures in the region have weighed negatively on their investment decisions, particularly for those operating in energy-intensive sectors. Nonetheless, investing their way out of the current crisis will not come without challenges and cost.

• Investing Longer Term. Development of new lines of business, R&D, automation, and digital transformation are seen as top growth strategies for their business over the next 2-3 years.

Interestingly, Executives in Europe rank R&D much higher than in the US or China (3rd versus 9th in the US or 8th in China). According to the H1 2022 edition of our European CEO Confidence survey, they are already taking decisive steps towards that direction. For example, more than two-thirds of respondents said they had increased or planned to increase their R&D spending in order to help solve shortages of materials. Then again, ramping up investment in R&D could also speed up their efforts to become less reliant on Russian energy and substitute Russian energy imports with greener alternatives.

• What About Human Capital? Recruiting and retaining talent will be a main area of focus in 2023.

European CEOs see strengthening organizational culture and improving corporate branding and reputation as key human capital strategies in order to attract and retain talent, ranking them 1st and 4th respectively out of a 29-item list (ranked 4th and 8th globally, and 2nd and 13th in the US, respectively). Additionally, developing workforce capabilities also comes high on their list of human capital actions. Economic growth in the Euro Area is projected to weaken over the next decade, and demographics is the main reason behind this weakening. As the European workforce is shrinking and ageing at a fast pace, competition for talent will also become more acute. Business leaders in Europe understand that keeping and attracting talent or upskilling/reskilling to boost their workers’ productivity will be crucial to their businesses’ growth and success in the short-term and beyond.

• The Supply Chain Reality. The relative majority of CEOs in Europe do not intend to alter their supply chains, but those who do must be better prepared if they want to succeed.

Although the war in Ukraine exacerbated supply bottlenecks globally, more than a third of CEOs in Europe and the US (36 and 44 percent, respectively) do not plan to change their supply chains in the next 3 to 5 years. Out of those who do, however, further localizing supply chains and re-orienting towards friendlier countries are the two most cited strategies in response to recent disruptions, while withdrawing from some countries follows next. All three strategies reflect emphatically Europe’s business leaders’ strong intentions to not repeat the same mistakes with Russia. Carefully altering their supply chains will be crucial to eliminate their dependence on foreign-owned sources (e.g., like in the case of Russian natural gas), mitigate future vulnerabilities, and safeguard their business from future crises.

• The Environment Effect. Europe feels the impact of climate change the most, with energy-induced costs topping the list of threats to their business operations.

Thirty-six percent of CEOs in Europe, more than in any other region, see climate change already having a significant impact on their businesses (22 percent globally and in the US). Another third (31 percent) sees this happening at some point over the next 5 to 10 years. When asked to identify the greatest climate change-related threats to their business operations in 2023, higher costs related to energy, followed by regulation and increased scarcity of resources top their list.
All in all, executives in Europe must consider energy efficiency as part of their climate plans and long-term business strategy as this can help reduce their business energy costs and make them proof against future energy crises.

• What’s Expected Next? Escalation of Russian cyberattacks, deeper economic sanctions, and the worsening of global food and energy crises is what they believe will unfold in 2023.

More than 85 percent of CEOs in Europe expect cyberattacks to intensify, 70 percent see economic sanctions increasing, and more than half expect global food and energy crises will worsen – a view pretty much consistent globally.

When asked to take a stance on how they think the war in Ukraine will evolve, the vast majority of respondents from Europe do not expect the war expanding to other regions, neither NATO engaging in war with Russia and vice versa or the use of nuclear weapons.

• Prepared for Future Gray Swan events? CEOs both in Europe and globally feel better prepared for events they have recently experienced.

A global pandemic, a recession or a financial crisis are major shocks CEOs in Europe feel confident they can lead through if they occur again in the future. In fact, the share of respondents saying their organization is either well or very well prepared to face these crises is larger in Europe than in all other major regions. Having said this, CEOs both globally and in Europe continue to be worried about dealing with uncontrollable, environmental-related crises - like food/water shortages and extreme climate events - or major risks like a nuclear war, a terrorist attack or an armed conflict between superpowers. The Conference Board’s new Gray Swan tool may be of help for leaders to be better prepared for these as well.

• About the Research

Profile of respondents This year’s C-Suite Outlook survey was conducted between mid-November and mid-December 2022, and 670 CEOs responded globally. Among major regions or economies, 16 percent of CEOs and other C-Suite respondents are based in companies headquartered in Europe; 24 percent in the US; 20 percent in Latin America; 13 percent in Japan and 12 percent in China. To provide a more comprehensive view of respondents from around the world, we weighted the responses in aggregate (such as global and major regions) by the square root of the respondent’s country share in the total number of responses from their country.