CEOs plan for global shocks
● Business leaders in Davos say they are increasingly turning to scenario planning to safeguard supply chains and lessen the potential hit from unexpected geopolitical crises.
Many CEOs and executives foresee an upbeat US economy in 2024 but are concerned about China and Europe, and the impact of unexpected global shocks on inflation.
This week’s annual World Economic Forum (WEF) took place against the backdrop of conflicts in the Middle East and Ukraine, as well as impending elections in dozens of countries.
“Just when governments and companies get their arms around how to deal with one flare-up, another emerges,” said David Garfield, global head of industries at consulting firm AlixPartners.
A big issue at board and executive leadership level is scenario planning, he added. “Sophisticated companies are saying: ‘What happens if raw materials for critical production cuts off?’”
Supply chain disruptions caused by the pandemic are barely in their rear-view mirrors and CEOs are now grappling with the impact of Houthi militant attacks in the Red Sea.
Many described the global situation as unusually worrisome. “In terms of scenario planning, the last few years have upped the ante,” said Ishaan Seth, senior partner at global consulting group McKinsey.
“It is not about forecasting the future but about having a perspective on how the world may play out. The key is, how do you pivot an organisation quickly?”
An AlixPartners survey found 68% of CEOs are adjusting their strategy as a result of US-China tensions, while 66% are concerned about the US presidential election.
“The [board-level] concerns are geopolitics and elections around the world,” said BCG global chair Rich Lesser. “When there is so much uncertainty, CEOs and boards ask: ‘What can I do to be better prepared?’”
Some have been looking to diversify supply chains. “Every Japanese company is seriously considering [changing] the origins of over-reliance — it is so risky,” Takeshi Niinami, CEO of Suntory, Japan’s second-biggest domestic drinks group, told the Reuters Global Markets Forum.
“So we like to move to, for example, India or some other countries like Vietnam, but it can’t be done overnight.”
ABB chair Peter Voser said geopolitical risks, including China and Taiwan, were part of boardroom scenario planning.
“One takes steps to deal with it day to day but also as a Plan B or C depending on what is going to happen,” he said, adding: “There should be no board in the world who takes this very lightly at this stage.”
Some bankers and CEOs are concerned about the potential for supply chain dislocations to reignite inflation. Most were upbeat about the US but concerned about Europe and China.
“I will be cautiously optimistic,” said Srini Pallia, an executive at technology services and consulting company Wipro, adding: “People expected the US to be in recession, now it’s a soft landing.”
The WEF meeting came as the global economy shows mediocre growth, while central banks hold interest rates high.
“Clients are cautiously optimistic. We are getting back to more of a normal environment. There is slower growth but sustainable growth,” Bank of America CFO Alastair Borthwick said.
The IMF in October forecast that global GDP growth in 2024 would be 2.9%, a dip from 2023’s 3%. It cut its 2024 growth forecast for China, which has been hit by a property crisis, to 4.2% and the euro area to 1.2%, but raised its US forecast to 1.5%.
Goldman Sachs CEO David Solomon expects the US to avoid a big slowdown this year, but warned that inflation could remain more stubborn than expected and weigh on growth.
“I still think there’s a risk, particularly around labour, food and gas, that inflation could be stickier than people expect,” he said.
Many doubt the US Federal Reserve will cut interest rates as rapidly as markets forecast as the US central bank first gauges whether inflation is headed firmly enough back to its 2% target to cut.
After 525 basis points of hikes since March 2022, the US rate futures market has priced in a rate cut as early as at the Fed’s March policy meeting.
CEOs said they hoped the economy would be resilient.
“We are slightly optimistic about the coming 18 to 24 months that economies can turn, interest rates can come down,” said Jesper Brodin, CEO at Ikea owner Ingka Group.