Arrogance often leads to unfavorable outcomes.
The global economy is on the mend, with markets showing a significant recovery since the low point during the pandemic. Economic growth is surging due to factors such as pent-up demand, vaccine distribution, and continued fiscal stimulus. However, this optimistic outlook is not without its challenges.
According to the Conference Board's latest survey of multinational CEOs, the level of CEO confidence is at its highest in the 44-year history of the survey. Yet, there are emerging risks that could counteract this current optimism and confidence.
Demand-driven inflation, housing price increases, labor shortages, and wage inflation are potential underlying economic pressures that could dampen this confidence. Gartner’s recent report highlights escalating trade tensions and tariffs as the top emerging risk in 2025, which alongside a volatile low-growth macroeconomic environment, could increase costs and disrupt supply chains globally.
Labor shortages and wage inflation remain concerns. Rising wages to attract scarce labor can increase operational costs for businesses, potentially squeezing profit margins and slowing hiring or expansion plans. Although the sources do not explicitly mention housing price increases, such increases would intensify inflationary pressures, particularly on consumer costs, which can feed back into cautious business sentiment.
In emerging markets, volatility driven by fiscal and trade uncertainties adds layers of risk. Abrupt policy changes or currency fluctuations could reverberate through global supply chains and financial markets, challenging a sustained optimistic outlook.
Corporate profits are on the rise, in part due to economic growth and aggressive fiscal stimulus. However, the consensus that the current inflation increase is only temporary may be questioned. The risk of sustained wage inflation exists if labor shortages spread. Rising housing prices, observed due to high demand, a shortage of existing homes, and rising costs for new construction, could potentially fuel demand-driven inflation.
The markets are advised to question assumptions in light of these emerging risks. Overlooking risks is a potential consequence when one feels the wind at their backs, often in the context of the markets. The human tendency known as "Recency Bias" involves feeling recent experiences more strongly than those in the past, which could lead to an overestimation of the continuation of the bull market.
Despite the relatively high unemployment rate, labor shortages in certain economic sectors are being reported, which could lead to employers significantly raising wages. This could further exacerbate inflationary pressures and contribute to a tightening labor market.
In summary, demand-driven inflation, labor market tightness, trade tensions, and emerging market financial volatility are notable emerging risks that could undermine CEOs’ current confidence and pose challenges to sustained market optimism. It is crucial for investors and businesses to remain vigilant and assess these risks constantly.
[1] Gartner, Inc. (2021). Top 10 Emerging Risks for 2025. [online] Available at: https://www.gartner.com/en/risk/top-10-emerging-risks [Accessed 15 Mar. 2022].
[2] The Conference Board (2021). CEO Confidence: Fourth Quarter 2021. [online] Available at: https://www.conference-board.org/data/ceoconfidence.cfm [Accessed 15 Mar. 2022].
[3] The Conference Board (2021). Global Economic Outlook: Data as of March 2022. [online] Available at: https://www.conference-board.org/data/geoeconomicoutlook.cfm [Accessed 15 Mar. 2022].
[4] OECD (2021). OECD Economic Outlook, Interim Report, December 2021. [online] Available at: https://www.oecd.org/economic-outlook/interim-report-december-2021-9f74611c/ [Accessed 15 Mar. 2022].
- Economic and social policy responses, such as fiscal stimulus and trade tensions, as highlighted in Gartner’s report, could significantly impact finance and investing decisions, potentially disrupting business plans due to increased costs and volatile supply chains.
- As investors consider their economic and social policy strategy, they should be mindful of emerging risks, such as demand-driven inflation, labor shortages, wage inflation, and housing price increases, which could dampen confidence and negatively affect profit margins and market optimism.
