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In its most recent Global Economic Prospects report, the World Bank said it expects global economic expansion to drop to 2.9% this year from 5.7% in 2021. This is 1.2 percentage points lower than the 4.1% predicted in January. 

The report then predicts growth to maintain this level from 2023 to 2024 while inflation remains above target for most countries, which points to stagflation risks. 

The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” World Bank President David Malpass commented

According to the report, growth in advanced economies will likely drop sharply to 2.6% in 2022 from 5.1% in 2021. 

Meanwhile, expansion in emerging markets and developing economies is expected to drop to 3.4% in 2022 from 6.6% in 2021.

“Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality,”  Malpass said.

The last time inflation was this high – in the early 1980s – Margaret Thatcher had been prime minister for two years. Channel 4 had just launched, and if you were aware of inflation at all, it was probably because the Wham! cassette you wanted to buy at HMV was a pound more than you expected.

Since then, inflation has rarely exceeded 4%. Generations of British and European finance professionals have spent whole careers making forecasts – where inputs and outputs were relatively stable most of the time. But that’s over now. Today, with Sterling and Euro zones’ inflation already running above 7.5% and no cooling in sight, monetary stability seems to be something else we lost during the pandemic – and adapting to this new reality is now a concern for chief financial officers (CFOs) and finance transformation leaders. 

What should you keep in mind?

This is a crisis with your name on it

The 2020s aren’t the 1970s reloaded. For CFOs and other finance leaders, managing this round of inflationary times is likely to be even more challenging.

The reason is that today’s CFOs have a broader mandate to help shape corporate strategy, supply chain resilience, pricing and procurement, as well as maintain a keen interest in the level of staff attrition in the business. As a finance leader, you may well be positioned to understand what is happening, but have you considered how finance should partner differently with the rest of the business?

Inflation is a five-alarm fire

Inflation will affect your firm, your employees, and your shareholders – but not everybody will be attuned to the dangers, and many may be underestimating the toxic effect of stagflation (i.e., inflation without growth). Your first job will be to convince everyone that mitigating its impact is a high priority. Unless your financial modelling capabilities are ready to simulate the limit of passing on any price increase to customers and contain input price hikes, inflation may not just hurt margins for a quarter or two, it may hurt your company’s profits and prospects longer term. Whether the challenge is procurement, outsourcing, pricing or hiring, you need a finance transformation and continuous improvement strategy, and that strategy should be executed based on proven best practices.

Prices and costs are moving targets

The costs of labour, materials, transportation, energy and other expenses are all increasing, but not necessarily at the same rate. To handle inflation, you will need a deep sense of the moving parts of your cost structure – particularly if a period of stagflation ensues and the growth slowdown limits your ability to raise prices. Enterprise-wide, too, it’s important to remember that inflation affects different businesses differently. Organisations in the hospitality business may be very concerned with foreign exchange risk, while industrial manufacturing organisations will likely be worrying more about the cost of raw materials and logistics. It goes without saying, of course, that working capital management will need even more emphasis. If you need to cut costs, do it intelligently. Benchmark your costs to look for opportunities and take another look at the benefits of digital transformation, which many companies today are finding to be a highly effective way to scale capabilities while reducing expenses.

The most valuable people in your team may be revising their CVs

In a very real way, inflation is a pay cut for your staff. If you don’t make it worth their while to stay, your best employees will leave. Keep this in mind as you draw up your own hiring and retention plan. Replacing finance professionals will be expensive, particularly because for many firms, proactive inflation management will require hiring more analysts. The shortage may turn out to be quite serious: we know of one company that is expanding its planning and analysis team by 40% and doubling its indirect sourcing and procurement staff so it can handle the added workload generated by additional price and cost modelling and more frequent contract reviews.

Refocusing the services of the finance business partners becomes paramount

Unfortunately, for many finance organisations, the activities of the finance business partners supporting management decisions may still be consumed by the wrong types of activities and priorities. High-performing organisations are instead revisiting the role that finance should play to help adapt the enterprise to this new reality, focusing on important questions: What is the breaking point where price increases begin to adversely impact demand across your products, services and channels? How much inventory are you willing to carry as warehousing costs increase? What is your exposure to rising interest rate differentials? How do you balance working capital management with the need to satisfy customer demands? What is your optimum cash position to take advantage of discount opportunities? What is your supplier credit risk? Do you understand the working capital drag created by the increasing cost of capital on our overall profitability?

The increasingly strategic role that the finance function plays in high-performing companies over the last decade gives legitimacy to the evolving role of finance. For instance, we foresee an enduring role for finance professionals in educating and coaching other leaders in navigating this challenging environment. This role will be supported by the unmatched analytic insight – an understanding of how the company’s value chain fits together, including research and development, commercial operations, and other enabling functions. As challenging as the rest of the 2020s may be for the prepared finance executive, they are also likely to be years of extraordinary opportunity. 

About the author: Gilles Bonelli is an Associate Principal at The Hackett Group’s Finance, Enterprise Performance and Business Intelligence Advisory Practice in Europe. 

So far, this year has been anything but typical. As nations have attempted to regain their footing after a difficult 19 months or so, inflation fears and spiralling energy prices have cast a very dark shadow on worldwide economic recoveries. 

Even as world leaders prepare to convene for the UN Climate Change Conference of the Parties (COP26), global fossil fuel prices are soaring. While oil prices have hit multi-year highs in the US, with Brent crude sitting at $86 a barrel, the situation in Europe grows grim, as crude and gas have crept up to near all-time highs. As we approach the colder months, where demand for these commodities usually tends to rise in line with changing weather conditions, many traders and investors may be wondering if we are in for a particularly volatile winter.  So, what factors should individuals consider when weighing up their investment activities? 

‘Stagflation’ may cast a dark shadow

One aspect which may exacerbate usual seasonal patterns is the fact that we are currently in a ‘stagflationary’ environment – a deadly combination of rising prices, rising wages, low productivity, low growth, and rising unemployment. No doubt, this will be a pressing concern for investors given recent CPI data, as a prolonged period of inflation may drive central banks to raise their interest rates. What’s more, energy rationing and contracting consumer budgets may also spell trouble for the economy, stifling global growth. The result of all this? Energy prices may pose a road bump on the path to post-Covid recovery.

As such, I would advise traders and investors to watch central bank meetings closely. Not only will the minutes of monetary policy committee meetings give a direct insight into the thoughts of leading economists on these issues, but they will also provide a forecast of where inflation is headed.

At the moment, inflation figures have steadied somewhat in the UK, where the energy crisis originated, to 3.1% in annual terms for September. That said, the newly appointed chief economist at the Bank of England (BoE) Huw Pill has offered some words of caution, warning that inflation figures may top 5% by early next year – which could prove problematic for a central bank with an inflation target of 2%. Now, traders and investors are expecting a potential interest rate rise from the BoE at their next meeting on 4 November. Up until now, the Federal Reserve and the European Central bank are months behind taking such action.

Investors should also consider the fact that, generally speaking, oil tends to have a significant effect on currencies, as it has a strong inflationary component. In effect, this means that any volatility in oil prices will result in serious implications for the FX world. While central figures maintain that, like inflation, the energy crisis is “transitory”, I would still advise investors to keep their ears to the ground for any rumblings about oil. 

COP26 will mark a shift to cleaner energy

Additionally, the upcoming COP26 summit on 31 October will contribute to something of a shift where usual seasonal patterns are concerned. Given that the recent energy crunch has marked a turn back to ‘dirtier’ sources of energy like thermal coal and oil, traders and investors can expect world leaders to recommit to old pledges to reduce their carbon emissions and accelerate these plans. While such efforts may seem like a given, the pace at which this transition occurs should provide traders and investors with some more nuance; so too will the inevitable opportunities that come along with an event like this. The summit will likely result in a new push for greener investments – clean energy sources, as well as the technology required to advance, transmit and store it, will provide new avenues to investors. Here, though, it is important to note that investing in any emerging market, and particularly energy, can come with some risks.  

‘Tis the season

While most investors are no strangers to the fact that cold weather conditions tend to result in higher energy prices – particularly in the winter months – worsening weather conditions could exacerbate this trend. At the moment, meteorologists are predicting that the UK is in for a bitter winter, which could result in further gas shortages and supply bottlenecks.

In short, it seems like this year we can expect normal seasonal patterns to be amplified by the energy crisis, as well as other extraneous factors. While none of this is certain as yet, traders and investors should ensure that they anticipate any market shocks.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information, please refer to HYCM’s Risk Disclosure.  

About the author: Giles Coghlan is Chief Currency Analyst, HYCM – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the internationally recognized financial regulator FCA. HYCM is backed by the Henyep Capital Markets Group established in 1977 with investments in property, financial services, charity, and education. The Group via its relevant subsidiaries have representations in Hong Kong, the United Kingdom, Dubai, and Cyprus.  

The Institute of Directors said sentiment had “fallen off a cliff” in September, contributing toward fears that the UK was headed for a dose of 1970s-style stagflation

The IoD’s warnings came as Bits continued to panic buy petrol and diesel and road while road traffic fell considerably. Online clothes retailer Boohoo said its profit margins were being tightly squeezed by the higher shopping costs.

The IoD said that the sharp drop in business confidence from +22 points to -1 points in September means a return to February’s pessimism when the UK entered into its third lockdown and many businesses were forced to once again close their doors. 

The IoD’s chief economist, Kitty Ussher, said: “The business environment has deteriorated dramatically in recent weeks. Following a period of optimism in the early summer, people running small and medium-sized businesses across the UK are now far less certain about the overall economic situation and the IoD Directors’ Economic Confidence Index fell off a cliff in September.

A higher proportion of our members expect costs to rise in the next year than expect revenues to rise. This is not helped by the government’s recent decision to raise employers’ national insurance contributions, which acts as a disincentive to hire just when the furlough scheme is ending.”

In the second quarter of this year, the Office for National Statistics upgraded its growth estimates for the UK from 4.8% to 5.5%. However, activity has slowed down since the middle of the year due to rising infection rates, the “pingdemic”, and supply chain shortages.

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