Energy Prices and Inflation Top CEO Concerns, GDP Growth Projections Cut, Pandemic Office Disruption
Energy Prices, Inflation Top Concerns of CEOs
Corporate CEOs are increasingly concerned that a volatile mix of energy price hikes, inflation and other fallout from the war in Ukraine could tip the U.S. economy into recession, according to a survey by a prominent economic research organization.
Uncertainty sparked in large part by Russia’s invasion of Ukraine has forced many corporate leaders to reassess growth assumptions, with 80% of survey respondents now expecting a recession in their primary business region within the next 12 months, according to The Conference Board’s mid-year “C-Suite Outlook” report released June 17.
The war and its economic fallout are also spurring companies to take action to improve supply chains, invest in renewable energy and protect against cyber attacks by international hackers. Nine in 10 CEOs surveyed by the Conference Board are now concerned about Russian retaliation through online attacks, and more than half, 53%, are focused primarily on making their supply chains more resilient.
The organization’s May 10-24 survey queried 750 CEOs and other C-suite executives in North America, Latin America, Asia and Europe. Corporate leaders said they are are increasingly concerned about inflation, with higher energy prices and higher production costs cited as the top two issues that will affect business planning in the next 12 months.
“As CEOs and other C-suite executives focus on ensuring the long-term growth of their business amid this volatile global environment, addressing labor force challenges will be essential,” said Rebecca Ray, The Conference Board’s executive vice president of human capital, in a statement. “To do this, firms are doubling down on the hybrid work model, automation, and improving their recruiting processes and communication around business strategy.”
Economists Trim GDP Growth Projections
Forecasters responding to a survey by the Federal Reserve Bank of Philadelphia are scaling back their expectations for real gross domestic product growth in the first half of 2022, reflecting emerging concerns about a key gauge of the economy’s health that often predicts real estate demand.
The regional Fed on June 17 reported the latest results of its twice-yearly Livingston Survey, in which 18 participating economists projected on average that the U.S. will finish the first half with 0.5% GDP growth from year-earlier levels. That’s well below the 3.9% growth prediction when the survey was last conducted in December 2021.
Forecasters are currently predicting that GDP growth will pick up in the second half of 2022, at 2.1%, but that’s down from the 3.5% second-half growth prediction made in December.
The panel expects the U.S. unemployment rate to remain at its current 3.6% at the mid-point of 2022 and to drop to 3.4% by year’s end, with both below the December predictions of 4% for the midpoint and 3.8% for 2022.
Inflation is now predicted to be at 7.6% at the end of 2022, down from its current 8.6% but still well above the 4.5% predicted in December 2021. Forecasters expect inflation to drop to 3.8% at the end of 2023, higher than the 2.5% predicted in December.
Pandemic Office Disruption Less Than Expected
Office use lags far behind pre-pandemic levels in most large U.S. cities, but Moody’s Analytics notes that central business hubs are still far from becoming ghost towns filled with financially ailing properties as some said would happen.
Office buildings generally are holding up fairly well more than two years into the pandemic, especially compared with their performance during downturns including the Great Recession over the past 50 years. A June 15 report from Moody’s analyst Kevin Fagan said there are “no clear signals that we are in the throes of an ‘office apocalypse’ — yet.”
Among other factors, the prominent financial-ratings firm notes that U.S. office rent and occupancy rate declines that followed the pandemic-induced 2020 recession are far less than what occurred during the prior three downturns. Also, total returns for institutional office investors took a minimal hit in the pandemic downturn, dipping slightly negative in the third quarter of 2020, and office loan delinquencies never spiked as some thought they would after the start of the pandemic.
“Despite some very modest increase in delinquencies in 2022, along with a handful of office loans liquidated at a high loss severity, the office loan delinquency rate is as low as it’s been since just before the 2008 financial crisis took hold,” Fagan said. “Other data beyond fundamental real estate performance metrics also show no clear trends of exodus from the office. Measurable clarity will take some years, as firms first resolve workforce management challenges and leases expire.”