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What do corporates have to worry about right now? Basically, everything

If CEOs, CFOs and supply chain managers thought getting to the other side of the pandemic would offer their company some relief, they need to think again. This year is throwing up a confluence of concerning indicators that are giving them all sleepless nights. And, as can be seen in China, the disruptive effects of COVID-19 are never far away.

Economic growth is slowing. In Germany, Europe’s largest economy, GDP in Q1 2022 was up 4% year on year—but back then, the country was reeling from a surge in COVID-19 cases and its vaccine programme had not yet gathered momentum. On a seasonally adjusted basis, Germany grew by just 0.2% on the previous quarter.

This situation is by no means unique to Europe—the US economy contracted by 1.4% in Q1 as the effects of stimulus waned.

This all comes as central banks begin tightening for the first time since the pandemic began. Many now speculate that the European Central Bank could hike rates as soon as July following speeches last month from ECB Vice President Luis de Guindos and Belgian Central Bank Governor Pierre Wunsch.

Tightening amid a slowdown is likely to compound the pain, but what should corporates be especially concerned about in the months ahead?

1/ It depends on your sector—manufacturing’s down but services are up 

The latest S&P Global Eurozone Manufacturing Purchasing Managers’ Index (PMI) fell to 55.5 in April, a 15-month low. In Germany, the closely watched economic indicator dropped to a 20-month low of 54.6. Both are still above the 50.0 “no-change” level and are therefore indicative of improving operating conditions within the goods-producing sector, but these figures still represent a sustained loss of growth momentum.

Headline PMI has now fallen for the third month running as manufacturers manage production curbs and spiralling input costs.

Services companies, however, have seen a rebound in demand, thanks to record spending on activities such as travel and recreation, sectors that have benefitted from a lifting of COVID-19 restrictions. But services businesses must be wary of the unfolding cost-of-living crisis—the recent surge in demand may be fleeting.

2/ Everybody is worried about the R-word 

Against this backdrop, borrowing is becoming more costly due to rising benchmark bond yields. Companies have to offer higher coupons to attract more risk-averse investors. Continued tightening by the ECB through the second half of 2022 will only add to this.

High commodity prices, rising inflation, slowing growth and the spectre of rate hikes all mean that a recession could be just around the corner. This would inevitably lead to a liquidity squeeze and further volatility in capital markets.

A lot hangs on the war in Ukraine. The longer it drags on, the more likely that Europe’s economy continues to slow. And while the risk of a global recession is more elevated today than it was six months ago, Europe finds itself especially prone compared with the US. The continent was already showing a weaker rebound from the pandemic. Another factor is that Europe imports far higher quantities of commodities than the US.

After last year’s largely successful vaccine rollout, it could still be some time before the region finds itself on a sustained recovery path.