CREDIT MANAGEMENT JULY and August 2022

NEWS SPECIAL - EXCLUSIVE
Stranger Tides
The uncertainties, pressures and risks
of the economic landscape across Europe.
AUTHOR – Tommaso Aquilante
SET to be the year of normalisation,
2022 has turned into a year of
growth deceleration, elevated
inflation, and more supply chain
bottlenecks. In Europe, wartriggered
pressures on food and energy
prices have eroded spending power and
are leading businesses to rethink their
competitive strategies. Unfortunately, the
outlook is likely to get worse before it might
get better.
Of the top 10 risks identified by Dun &
Bradstreet’s Country Intelligence Group for
the second quarter of 2022, supply-chain
disruption is the most pertinent for the
global risk environment, with the Russia-
Ukraine war and China’s COVID-19 strategy
adding pressure on already strained
production chains. Global inflation, a top
concern before the beginning of 2022, is
becoming increasingly entrenched, with
major central banks facing a somewhat
forgotten enemy, galloping inflation, after
years of price stability.
AN UNPREDICTABLE LANDSCAPE
To contain inflation, the Bank of England
inaugurated a tightening era at the end of
2021; the Federal Reserve Bank followed
suit in early 2022 with a rate hike cycle
which is now well underway. Interestingly,
the European Central Bank has so far left
the rates unchanged, despite signaling a
more hawkish policy stance for the second
half of 2022. However, there is a sense that
major central banks are behind the curve,
and the corridor for a soft landing of the
economy is increasingly narrower.
The most recent data indicates that
GDP in major Euro-area economies, such
as Germany, France or Italy, has barely
grown in the first quarter of 2022. In the
UK, growth has been higher than in other
large European economies (0.8 percent),
but core inflation is higher too, constantly
exceeding expectations and forecasts. This
higher pressure on prices is in part likely
due to Brexit, which might have acted as
a shock amplifier via larger trade barriers
(the Trade and Cooperation Agreement
was no substitute for free trade or the EU
agreement), reduced labour supply and
greater uncertainty.
If, as it now seems likely, the current
crisis triggers mild recessions in some
European countries, COVID-style fiscal
support seems unlikely to materialise. On
the contrary, since many economies exited
the pandemic with WWII-levels of debt to
GDP, Governments will likely try to ‘balance
the books’ much more than in the recent
past. At the same time, central banks are
at a delicate juncture, with their credibility
hinging on their ability to keep inflation
expectations of firms and households
anchored via tighter monetary policy.
THE BUSINESS IMPACT
Moving forward, ultra-low interest rates
are set to make room for tighter financial
conditions at a time when de-globalisation
forces seem to be gaining momentum.
Both these trends pose risks to businesses,
especially now that the war in Ukraine is
lasting longer than expected. On the one
hand, expansionary monetary (and fiscal)
policy contributed to keeping business
failures artificially low in the last two
years. A more restrictive monetary policy
stance will, all things being equal, have
the opposite effect, possibly pushing
those firms at the brink of survival out of
business.
On the other hand, a politically driven
reconfiguration of trade patterns would
require a substantial reallocation of
resources. Re-directing trade flows would
be costly for firms, especially for small and
medium sized businesses, as they invest
in learning about new markets and new
potential business partners (this would
require additional desk work and field work
for example).
A reorganisation of supply chains on a
global scale would also add inflationary
pressure. While the ifs and the whens
of this reorientation of exchanges are
Brave | Curious | Resilient / www.cicm.com / July & August 2022 / PAGE 6