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Innovation

What will business in Europe look like in 2022? IMD expert predictions

Published 3 January 2022 in Innovation • 4 min read

Action to stem greenhouse gas emissions will accelerate, forcing businesses to internalize the cost of their actions, say experts in strategy, sustainability and finance.

Europe is about to tighten sustainability disclosure requirements, and governments will need to see the cost of carbon rise to encourage investment in greener technologies, according to premonitions offered by IMD experts.

As we head into the New Year, professors thought that more EU member states would make COVID vaccines mandatory, and shortages of supplies and labor would continue into 2022, slowing down growth and prolonging elevated inflation — prompting central banks to raise rates next year.

Though Europe may seem ever more unpredictable, forecasts are no woolly exercise. The practice of scenario planning can inform long-term strategy and near-term decisions, and help executives to deal more effectively with the unexpected.

Support to rise for compulsory vaccinations  

The exercise suggests that the geopolitics of COVID will shape many business risks in Europe. Mandatory vaccinations will create tensions. Some EU member states are pushing holdouts to get jabs. More will likely follow. “There is a real chance that societies begin to fray as the vaccinated point the finger at the unvaccinated and everybody blames governments for either doing too little or too much,” said political economy expert David Bach.

Add to that the presidential election in France next year, and the Hungarian parliamentary elections, the EU’s standoff with Poland, tensions with Russia, and the post-Brexit saga, and all the ingredients are in place for a rocky 2022. “Strategic agility and a clear corporate purpose will be key as leaders will have to make quick decisions under close scrutiny,” said Bach.

Global sustainability standards are coming  

Another area of significant focus was sustainability, which reflects the growing pressure that businesses are under to accelerate climate action. At the COP26 climate conference, the body that develops international accounting standards (IFRS Foundation) said it would create a new board for sustainability disclosure requirements (ISSB). IMD experts expect that firms will face more rules on ESG reporting in 2022.

Carbon prices will rise further  

In addition, after COP26, European carbon prices spiked to a record high above €66 a ton. IMD professors predict the after-effect of the COP talks, while not as strong as some had hoped, will lead to the cost of carbon rising as governments look to green the European economy. “The price of carbon will rise further,” predicted Karl Schmedders, Professor of Finance at IMD.

One way to stay ahead of compliance requirements is to embed sustainability into core business strategy and operations. “Firms will revamp their supply chains, embrace new forms of sustainable financing, and reinvent products and services to ensure they are accountable for their ESG performance,” suggested Natalia Olynec, Head of Sustainability at IMD.

Labor, supply constraints and inflation will persist  

Our experts anticipated that shortages of supplies and labor would continue into 2022, which risk slowing down growth and prolonging elevated inflation. With materials costs and international freight rates soaring, inflation is now seen as more “baked in” instead of transitory. The price increases and component availability risk dragging the supply chain crisis into 2022 and beyond.

“The bullwhip effect is in full swing,” said Carlos Cordon, Professor of Strategy and Supply Chain Management, referring to the situation when changes in consumer demand cause fluctuations in orders and inventory levels, stressing supply chains. He cited the global chip shortage, which threatens the supply of consumer electronics and cars for at least another year.

One way to overcome the bottlenecks would be to shift production methods depending on component availability, like how the chip shortage has forced carmakers to strip out high-tech features to keep production going. Consumers may have to get used to reduced product availability in the year ahead.

Interest rate rise in 2022 more likely  

IMD professors expect central banks in Europe to raise inflation forecasts yet again. They also expect monetary policymakers to quell fast-rising prices by raising rates next year. “The central banks will have the mandate to keep economies growing but prevent them from overheating,” said Patrick Reinmoeller, Professor of Strategy and Innovation at IMD.

He said companies will need to “reduce their dependence on cheap money” and like most long-lived companies rely more on cash flow than credit to fuel their growth in the year ahead.

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