Why European CEOs face speedbumps, not roadblocks

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.

For those who indicated that they are planning for a severe or persistent downturn in the global economy and/or their primary market. To what extent did they agree or disagree with the following statements?

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.

Which of the following do you consider to be the greatest risks to the growth of your business?

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%). 

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.
3. 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. 

In response to economic headwinds, are you planning or considering any of the following steps in the near term?

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.