What do business leaders and chief economists in Europe see when they survey the landscape for 2022-23 growth? In a series of recent conversations with these Members from The Conference Board, five macroeconomic issues rise to the top.

1. Inflation will be higher for longer

Planning for inflation to return to close to a normal rate in 2023 should be abandoned. It is now widely acknowledged that inflationary pressures for consumers are intensifying and expected to worsen in the coming months. Energy prices reacted quickly to the shock of the war in Ukraine, yet food prices may only see the full impact starting in the second half of 2022. Not only will inflation stay high for longer, but inflation expectations will also be affected. The global economy may be moving towards a new path of weaker growth and higher inflation.

2. Elevated input prices and shortages may shutter production of some goods

The increase in input costs is even more pronounced than consumer inflation. In the euro area, consumer inflation is nearing 6 percent year-on-year (based on February data), while producer price inflation is running above 30 percent year-on-year (January). In a fast-moving environment, adapting prices is challenging, but one solution could be to tie contract pricing to consumer price inflation or some other inflation measure. This may not be an option in industries where contracts are negotiated for longer periods, or attractive for partners that may have already adapted their pricing ahead of the war. On top of pricing challenges, some inputs are becoming increasingly difficult to source. As a result, more production lines may temporarily stop in 2022. Announcements of temporary plant shutdowns due to shortages in semiconductors and parts in the US, Italian and German auto industry are a case in point.

3. Corporate neutrality is no longer an asset

Investors are becoming more vocal about the reputational risk of doing business in autocratic countries; staff question the decision of companies that are not leaving the Russian market. Stakeholder concerns arising from the war in Ukraine are not surfacing around businesses with operations in China or India, but there are cases where new investment is on hold, waiting for greater clarity on US-China and EU-China relations. Multinationals need to deeply rethink their global footprints as trade and economic policies shift —a process that will take years but is surely starting now.

4. Politics will lead to a fragmented world

The war in Ukraine is accelerating trends underway towards deglobalization and localization since China trade sanctions. Businesses have begun to diversify supply chains to break reliance on China, and this is likely to continue. In the long term, western multinationals should prepare to contend with fragmentation in its many forms. They should expect investment and sourcing to take place closer to or in home markets, or with like-minded partners, further dividing the global economy into trade blocs. Fragmentation comes with a cost. Companies face considerable challenges with optimizing supply chains for resilience that have been optimized for the lowest cost. They will not be cheap or easy to unwind.

5. Recession risk rises with geopolitical uncertainty

There is fundamental uncertainty around how the conflict will end, or whether it will escalate, for example, through spillover into NATO territories or with a more active backing of Russia by China. Recession risk is rising. According to some business leaders, the risk is now higher than 50 percent in the US. High levels of saving and additional government stimulus may not help much, as consumers will tend to want to save more because of uncertainty. Monetary policy in the US aimed at solving rising inflation risks damaging growth. New increases in COVID-19 cases globally, and especially in China, remain in the frame. As a result of all these uncertainties, many businesses are working with multiple scenarios while hedging is becoming costlier and more difficult.