War in Ukraine and High Energy Prices Will Shape the Global Business Environment for the Long Term  

The Conference Board Measure of CEO Confidence™ for Europe by ERT plunges to 37 in the first half of 2022, down from 63 in the second half of 2021. The overall Measure is based upon responses to questions about current economic conditions as well as expectations for the economy and own industry six months out. The reading, currently below 50 points, reflects more negative than positive responses. The current level of confidence is similar, albeit a notch higher, to confidence observed in the first half of 2020, after the start of the pandemic.

Insights for What’s Ahead

• The Conference Board Measure of CEO Confidence™ for Europe by ERT captured CEO views during the second half of April 2022. Confidence plunged to 37 in the first half of 2022, from 63 in the second half of 2021. Expectations for the economy over the next six months are worse compared to the beginning of the COVID-19 pandemic. The unprecedented events that began on February 24^th have not only caused a severe security and humanitarian crisis in Europe, but also resulted in a worsening outlook for the region’s economy. Historically high energy prices, renewed supply chain disruptions, as well as eroding consumer confidence, are all putting downward pressure on Europe’s growth prospects.
• What is striking about the 2022 H1 survey is that despite the major change in the international landscape and the large decline in confidence, positive views regarding investment over the short run outweigh negative views, both in Europe and outside Europe. Hiring intentions remain surprisingly stable in Europe, signaling that the labor market should remain strong over the next six months. The outlook for sales declines more visibly but remain in positive territory.
• With April year-over-year inflation at 84 percent in the Euro Area, and producer prices growing at double-digit rates, the impact of the war in Ukraine is already being felt by consumers and producers, especially through the increase in energy prices. How long will it take for energy prices to return to prepandemic levels? A large proportion of CEOs and Chairs surveyed (40 percent) believe this will happen from 2024 onwards. More than a third (38 percent) do not expect energy prices to drop back to prepandemic levels at any point of time.
• Passing part of these rising costs onto consumers has been done or is underway in their organizations, according to 85 percent of responding CEOs. Half of business leaders say they are planning to also absorb price increases into profit margins, but 40 percent say this option is not part of their strategy. Despite challenges associated with the current energy crisis, two-thirds of respondents say they do not expect any significant slowing of Europe’s efforts to reduce greenhouse gas emissions by 55 percent in 2030. In fact, many feel that corporate and government climate actions are more likely to accelerate than decelerate over the medium term.
• Five years from now, global production networks will likely look different. Four out of five respondents expect an acceleration in the division of the world into competing economic blocs. A majority of respondents expect the supremacy of the US dollar as a global currency to stay about the same, but 23 percent believe it will decline. How will these changes translate in the European context? Eighty percent of CEOs and Chairs surveyed believe that an increasing number of sectors will be considered national security priorities, and two-thirds expect that the war in Ukraine will result in an acceleration of the EU’s ability to reach Open Strategic Autonomy. Launched in 2020, the goal of this policy is to reduce dependencies on the import of strategic inputs and promote European values and regulatory standards.
• As a result of the evolving geopolitical environment, a large majority of CEOs and Chairs are accelerating plans to find new suppliers, whereas about half also invest in increased production capacity in Europe. Does that mean reducing dependency on Chinese suppliers? Not necessarily. A third of Chairs and CEOs respond that this is done or under way, whereas 44 percent of respondents say reducing dependency on Chinese suppliers is not considered part of their supply chain strategy. Views are also divided on the medium-term outlook, with 48 percent of respondents expecting decoupling from China will accelerate and 46 percent expecting the decoupling to proceed at about the same speed.