Greater geopolitical instability and surging inflation have been added to the macroeconomic factors that corporate leaders must account for when making business decisions. Moreover, interest rates are increasing, and supply chains continue to be stressed. Oversight in this environment will require corporate boards to test the breadth of management’s scenario analyses and its consideration of exogenous shocks.
While global GDP forecasts continue to point to growth, deceleration is expected this year and into 2023. And, according to the latest KPMG Global Economic Outlook, further escalation of the Russia-Ukraine war could exacerbate downside scenarios.
Few executives have experience with the economic factors at play today. It has been more than 40 years since we’ve seen inflation this high—greater than 5 percent in many developed countries. Even at full employment in the U.S., companies must be cautious about the impact of inflation and rising rates. Does the board understand management’s strategy, and the related risks, to maintaining a resilient organization?
Directors should be prepared to probe management on the following issues in the coming months:
Scenario planning. U.S. GDP declined at a 1.4% annual rate in Q1 2022, an unexpected outcome given that consensus expectations pointed toward growth. Despite the miss, KPMG believes that the risk of a recession for the U.S. economy over the coming year remains low. However, others believe that quicker Fed moves on interest rates and less policy accommodation (e.g., reduction of the Fed’s balance sheet) increases the risk of a recession in 2022.
Growth, capital allocation, and resilience. In the United States, inflation is outpacing wage growth, which will dampen consumer spending to some degree. Together with a higher cost of capital due to rising interest rates, companies should reevaluate their growth initiatives, including financing, expected returns, and time horizons. Moreover, the interest rate environment will impact dividend policies and buyback initiatives.
Building resilience—in operations, in supply chains, and on the balance sheet—requires money and may come head-to-head with the need to take costs out of the business.
Hedging against commodity, currency, and interest rate fluctuations. With more than two years of operating in an environment impacted by COVID-19 and supply-chain disruptions, companies have already adjusted sourcing and financing for many critical inputs. Now, emerging economic stressors have applied new strains.
Fair value and asset impairments of businesses. Companies need to consider the accounting and financial reporting impacts of market volatility, the Russia-Ukraine war, and related sanctions.
Environmental, social, and governance (ESG) initiatives. Shareholder expectations for corporate commitments to sustainability and diversity, equity, and inclusion have grown significantly. Higher energy and commodity prices have emphasized the financial underpinnings of these issues. Similarly, company commitments to employees, communities, and other stakeholders have a real cost and could become more challenging to implement.
While economic growth is expected to continue, the appropriate board and management stance in the face of resurgent volatility will help keep the company strongly positioned for the future.
For more, see KPMG insights on the economy .
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