6 minute read 6 Feb 2023
Frozen ice tunnel
The CEO Imperative series

Why European CEOs face speedbumps, not roadblocks

Julie Hood
By Julie Hood

EY EMEIA Strategy and Transactions Leader

Passionate ambassador of an entrepreneurial mind-set in the workplace. Aspiring digital guru. Avid supporter of innovation. Trained architect. Youth mentor. Charity volunteer. Mother.

6 minute read 6 Feb 2023
Related topics CEO agenda Strategy and Transactions Mergers and acquisitions
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  • EY CEO Outlook Pulse Survey - Europe highlights - October 2022

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The January 2023 EY European CEO Outlook survey finds European CEOs see short-term challenges, but have reasons for optimism.

In brief

  • Supply chain issues, energy prices, inflation and government responses continue to impact the economic outlook in Europe. 
  • Despite ongoing challenges, CEOs are becoming more optimistic that a recession will be short lived.
  • Businesses can prepare for long-term growth opportunities with a strategic focus on operations, digital, ESG, talent and portfolio management.

While the global economic outlook will likely remain challenging in the months ahead, there are reasons to expect positive developments on a longer time horizon, as CEOs continue to adapt their strategies to navigate the impacts of inflation, central bank interest rate increases and the war in Ukraine.

The January 2023 EY CEO Outlook Pulse survey, which includes 390 responses from European CEOs, finds that while 98% of respondents are expecting a global recession, a majority of European CEOs (52%) expect this to be temporary and not a persistent one. This is a greater percentage than CEOs globally (48%) and points to more long term optimism for the global economy amongst European CEOs.

While recessions in European markets were likely inevitable due to uncertainties driven by inflation and the energy crisis, there has been some respite in the form of fading pressures from energy prices and other costs, improvement of manufacturing activity and easing of supply chain pressures. According to the latest forecast from Consensus Economics1, the risk of a severe recession lingering over the European Union (EU) has diminished, with several factors contributing to the improved outlook. Those include security of the EU’s gas supplies, automotive production within the Eurozone exceeding expectations, and European governments providing strong fiscal support to address high energy prices, high inflation and cost-of-living crises.

From the survey, 47% of European respondents agree that this recession will be different from previous slowdowns. The recent crisis is more driven by myriad geopolitical challenges and ongoing fallout from the COVID-19 pandemic, compared with previous recessions primarily being driven by financial and credit market factors. Many CEOs are acknowledging this difference and are aware that they need new and sustainable approaches to build the resilience required in these uncertain times.

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  • Image description

    A chart showing that 47% of CEOs believe this downturn will be different from previous slowdowns, exacerbated by geopolitical tensions, supply chain disruptions, talent shortages and ongoing COVID-19 uncertainty. The chart also shows a majority (53%) have confidence that fiscal and policy decisions will mitigate the worst of a downturn and shorten its length.

In our previous survey from October 2022, ongoing pandemic-related concerns, such as supply chain issues, took precedence. However, supply chain pressures have now eased to some extent, with data from S&P Global’s Purchasing Managers’ Index (PMI) showing improvement. Only 32% of European CEOs now cite supply chains as the key issue (down from 41% in October).2 

Given recent inflationary pressures and the upward movement in interest rates, European CEOs are increasingly focusing on the policies and steps they believe European governments should take to help businesses mitigate the downturn.

  • Image description

    A chart showing that 35% of European respondents consider uncertain monetary policy and increasing cost of capital as the biggest challenge to growth.

Around 35% of European respondents (compared to 32% globally) consider uncertain monetary policy and increasing cost of capital as the biggest challenge to growth. With inflation beginning to decline in November 2022 after 17 months of upward trajectory, CEOs are closely following central bank activity for potential course changes.3 If signs are sustained that inflation has peaked, the European Central Bank will likely slow the pace and scale of interest rate hikes.

In response to the current recession, EU policymakers are considering more dovish economic recovery proposals, as opposed to the top-down austerity rules seen during the sovereign debt crises a decade ago. This includes rethinking debt rules to help countries navigate this downturn.4 

In tandem, EU governments face pressure on how to handle the discontent of citizens protesting against soaring cost of living, and questions still remain on how extensively they will intervene. In particular, governments are reluctant to pursue austerity measures as a result of protests from the crisis 10 years ago.

Meanwhile, for CEOs, financing will continue to be a challenge as a result of increased capital costs that will likely persist, hindering growth plans. And with more fragmentation across the global economy, restrictive regulatory policies also pose obstacles to business growth, with 31% of European respondents citing this as the greatest challenge.

Avoiding reactionary responses, European CEOs use the downturn to prepare for the next disruption

European CEOs have learned from past financial crises and recognize that it is essential to think of new and sustainable strategies to capitalize on the opportunities. Five directives in particular offer a path forward, and are worth exploring:

  1. Investing in operations: European CEOs identify investing internally to boost operations as extremely important. Risk isn’t only about extraordinary events; day-to-day operational failures can also lead to losses, regulatory action and reductions in share prices. Operations such as finance, accounting and supply chain have emerged as the top priority area of investment for European CEOs (41%). 

  • Image description

    A chart showing that operations such as finance, accounting and supply chain have emerged as the top priority area of investment for European CEOs (41%). It also shows that around 38% of European CEOs are looking to invest in digital transformation, data and technology to emerge stronger from this downturn. 39% are looking to invest in sustainability, including net zero and other environmental issues, as well as societal priorities. 

  1. Recognizing disruption and accelerating digital transformation: There is ongoing pressure on businesses globally to embrace new technologies and digital transformation, both as a driver of new growth and as a source of increased efficiency. The COVID-19 pandemic further accelerated the existing trend toward digitalization. Around 38% of European CEOs (in line with the 37% globally) are looking to invest in digital transformation, data and technology to emerge stronger from this downturn.

  2. Developing a strong environmental, social and governance (ESG) strategy: Businesses need to ensure ESG processes are moved to the center of business strategy. Sustainability – including net zero and other environmental issues, as well as societal priorities – is one of the key areas that European CEOs identify as a need for more investment.

    Incorporating sustainability and ESG as a core aspect of all products and services to engage customers is critical. Some 32% of European CEOs already see it as an important strategic action to be pursued in the next six months.
  1. Nurturing talent: Despite the recession, the labor market remains tight in Europe. European CEOs are weighing cost management options, with 37% considering a move to contract employment and 38% planning on reducing learning and development (L&D) investments. Around one-third (32%) are also considering a restructuring or reduction of their workforce — lower compared with global and Americas CEOs (36% and 42%, respectively) considering the same approach. 

  • Image description

    A chart showing that 37% of CEOs are considering a move to contract employment and 38% planning on reducing learning and development (L&D) investments. It shows one-third (32%) are also considering a restructuring or reduction of their workforce. 

With significant movement of talented people in the Great Resignation and “quiet quitting,” CEOs understand the importance of retaining talent and upskilling them for the future. Offering people attractive career pathways, the flexibility of hybrid working, ongoing opportunities to grow and learn, and value-oriented work is essential in today’s market.

Two-thirds (67%) of European CEOs agree that hybrid working, including remote working, is increasingly critical to reducing employee churn and attracting new talent. Moreover, more than half (51%) of the European CEOs agree that during a downturn, there is an even greater need to focus on workforce wellbeing, including by supporting issues such as childcare and mental health.

  1. Portfolio transformation: Portfolio rebalancing is likely to be a key theme as CEOs will be compelled to make bold decisions regarding their business portfolio. During a recession, companies must critically assess what their core businesses are, what their focus should be and where they can create value by spinning out or selling non-core assets. Some 93% of European CEOs consider prioritizing restructuring opportunities as an important initiative in the next six months. 

Show resources

  • Show resources#Hide resources

    1. “Recession in eurozone ‘less severe than feared,” China Daily, November 20, 2022, accessed via msn.com.
    2. “Darkest days likely over for euro zone factories, Dec PMIs show,”The Economic Times, January 03, 2023.
    3. “Eurozone inflation drops for the first time in 17 months,” Politico.com, November 20, 2022.
    4. “EU proposes more forgiving debt plans a decade after crisis,” The Associated Press, November 7, 2022.

Summary

With early signs of hope that geopolitical issues driving recessionary economic pressure are de-intensifying, the months ahead will be pivotal for businesses. European CEOs should continue to keep a careful watch on policy decisions and macroeconomic indicators and be prepared to take decisive actions across digital, ESG, talent and portfolio management to grow quickly on the back of a broader market rebound when it arrives.

About this article

Julie Hood
By Julie Hood

EY EMEIA Strategy and Transactions Leader

Passionate ambassador of an entrepreneurial mind-set in the workplace. Aspiring digital guru. Avid supporter of innovation. Trained architect. Youth mentor. Charity volunteer. Mother.

Related topics CEO agenda Strategy and Transactions Mergers and acquisitions
Upvote