The war in Ukraine has had a negative impact on business sentiment and outlook in Europe, according to the Deloitte European Chief Financial Officers Survey. The survey, which covers 19 countries and more than 1,500 CFOs, was conducted two weeks after the Russian invasion of Ukraine, which may have amplified the uncertainty expressed by CFOs.
The survey reveals that the main challenges and risks faced by businesses as a result of the geopolitical situation are:
- High inflation: CFOs see inflation as one of the most significant future risks. Inflation remained persistently low during the past decade but recent surveys had revealed that CFOs were expecting upward pressure to emerge. The war in Ukraine has caused inflationary expectations to soar. CFOs expect the average inflation rate in 12 months’ time for the euro area to increase considerably from 2.7% in the autumn survey to 5.9%.
- Low growth: CFOs report a sharp decline in companies’ financial prospects compared to autumn 2021. Economic activity had been recovering as lockdown measures from the COVID-19 pandemic gradually eased. The service sector was bouncing back and the demand for manufactured goods had risen quicker than many expected – until the invasion on February 24. The immediate fallout was a pronounced drop in business expectations. CFOs report a record level of risk driven by geopolitical events and inflation.
- Supply chain disruptions: Two out of three CFOs report supply chain disruptions as being high or very high, and these disruptions are expected to remain a prominent part of the business landscape well into 2023. The war in Ukraine has exacerbated the existing problems caused by the COVID-19 pandemic, such as the scarcity and rising cost of raw materials, commodities, energy and transport. These factors have put pressure on operating margins and profitability.
- Lower consumer sentiment: The war in Ukraine has also affected consumer confidence and spending, which are crucial for economic recovery and growth. Consumers are facing higher prices, lower incomes, and greater uncertainty about the future. This may reduce their willingness and ability to spend, especially on discretionary items. Consumer sentiment indicators have shown a deterioration since the start of the conflict.
- Higher commodity prices: The war in Ukraine has also impacted commodity markets, especially energy and metals. Ukraine is a major transit country for natural gas from Russia to Europe, and any disruption or escalation of the conflict could affect gas supplies and prices. Moreover, Russia is a large producer and exporter of oil, coal, iron ore, and other commodities, which could also be affected by sanctions or military actions. Higher commodity prices could increase production costs and inflation for businesses and consumers.
- Tighter financial conditions: The war in Ukraine has also increased financial market volatility and risk premia, affecting borrowing costs and access to capital for businesses. The war has heightened geopolitical risks and uncertainties, which could trigger capital flight, currency depreciation, and sovereign debt crises in some countries. Moreover, the war could also affect trade flows and foreign direct investment, especially between Europe and Russia.
- The survey also discusses the implications of these challenges and risks for different sectors and regions. The survey notes that the European economies will likely be hit hardest by the war, especially in goods-producing industries such as manufacturing, construction, mining, and agriculture. These sectors are more exposed to supply chain disruptions, higher commodity prices, lower demand, and trade barriers. On the other hand, some sectors such as technology and health care may show more resilience, as they benefit from digitalization, innovation, and social needs.
Comparison with Previous Surveys
The survey also compares the current results with the previous ones in autumn 2021, showing a steep decline in financial prospects, confidence, and risk appetite. The net balance of CFOs who are more optimistic about their companies’ financial prospects has fallen from 32% in the previous survey to -29% in this survey. The net balance of CFOs who think that now is a good time to take greater risk on to the balance sheet has also dropped from 16% to -12%. The level of uncertainty reported by CFOs has reached the highest level recorded since the survey’s inception.
Despite these challenges and risks, the survey also reveals some positive aspects of the business outlook. The survey shows that businesses are still looking to grow, with a continued focus on investment and expansion as a top balance sheet priority. The net balance of CFOs who expect to increase capital expenditure in the next 12 months has risen from 38% in the previous survey to 41% in this survey. The net balance of CFOs who expect to increase hiring in the next 12 months has also increased from 30% to 33%. The net balance of CFOs who expect to increase revenues in the next 12 months has remained stable at 57%.
Conclusion
The survey concludes by stating that the war in Ukraine has created a severe uncertainty for European businesses, which will require careful monitoring and management. The Deloitte survey also suggests that businesses should prepare for various scenarios and potential outcomes of the conflict, and seek opportunities to mitigate risks and leverage strengths. Finally the survey analysis states that businesses should be proactive and flexible in dealing with the uncertainty, and use their resources and capabilities to adapt and thrive in a changing environment.
