Chapter 1
Tackling inflation and avoiding a widening of the inequality gap
Sound judgment is needed to safeguard economies and protect the vulnerable.
Inflation continues to rise
Before the war in Ukraine, inflation had already been rising as pandemic-induced supply chain disruptions met a rise in consumption. This was partly driven by loose monetary policy and government stimulus spending, and partly due to a shift in demand from goods to services.
Now the war in Ukraine has sent the price of energy, food and other commodities soaring. The US Consumer Price Index (CPI) increase reached a 40-year high of 8.5% in March 2022. In the euro area, inflation is forecast to peak at 6.9% in the second quarter, while the Bank of England expects UK inflation to hit 10% later in 2022.
US Consumer Price Index (CPI)
8.5%increase in March 2022 means the US CPI hit a 40-year high.
Although inflation could help governments reduce the burden of their pandemic-induced debt, price hikes hit the poorest hardest, deepening inequalities and potentially fueling populism. This presents a difficult policy trade-off: the need to curb inflation without triggering recession.
Even before the war, central banks were raising interest rates and are likely to continue this path. This worries CEOs because such rises risk dampening growth, eroding the value of citizens’ savings and adding to the squeeze on domestic borrowers. Interest rate rises also disproportionately hurt emerging economies, with high levels of public debt and greater reliance on exports.
Balancing fiscal policies with protecting long-term growth
Tighter fiscal policies such as tax increases and reduced spending are an alternative lever, particularly in countries with high employment. However, tax increases need targeting to protect the most vulnerable and safeguard economic growth.
Many governments are considering measures such as:
- Minimum corporate income taxes
- Windfall taxes on energy companies
- Digital services taxation
- Environmental, social and governance (ESG) behavioral taxes, such as carbon taxes or plastic bag tax
- Higher taxation of wealthy individuals
These measures all impact companies, whether directly or indirectly.
The inflation-taming task is made trickier by the desire of many governments to assist struggling businesses and households. Again, careful targeting of temporary measures to those most in need will be key to providing immediate relief and fending off wage-price spirals. Options include issuing one-off cash transfers or vouchers to offset rising fuel and food prices; increasing the level of unemployment insurance; and raising the threshold at which individuals become liable for income tax.
To avoid adding to inflationary pressure and increasing public debt, governments will need to balance these measures with a greater focus on government efficiency and proactive management of public finances. For example, this may be through cost control; debt refinancing; asset sales and better leveraging real estate; and through a crackdown on tax evasion and fraud.
Governments also need a proactive approach to combating inflation in the longer term. This could involve working to ensure open and competitive markets and addressing supply side constraints by developing alternative sources of energy and key commodities.
Chapter 2
Resuming an inclusive and sustainable growth path
There is a focus on driving economic growth, but not at any cost.
The war in Ukraine has slowed the nascent post-pandemic rebound in the global economy. The International Monetary Fund (IMF) expects global economic growth to slow from 6.1% in 2021 to 3.6% in 2022 and 2023.1 This is due to trade and supply chain disruption; rising commodity prices; tightening monetary and fiscal policies; and lower investor and consumer confidence.
Global economic growth in 2021
6.1%as reported by the IMF.
Global economic growth in 2022 and 2023
3.6%based on the IMF’s most recent forecast.
Just as the pandemic-induced slowdown exacerbated existing inequalities, hurting the poorest households and nations the most, so these economic headwinds will hit vulnerable populations and low-income countries hardest. At the same time, economic growth and carbon emissions have historically gone hand-in-hand, but relying on fossil fuels to power growth will undo international efforts to avert catastrophic levels of climate change.
Re-kindling economic growth while ensuring a fairer future for all
This is a key challenge for governments. Looking toward a more sustainable future, they may consider the following important priorities:
- Providing financial support to companies or sectors most affected by soaring prices, if this would yield significant economic, social or environmental benefits
- Focusing on job creation and skills development in sectors or regions hardest hit by recent crises, as well as those most affected by the green transition
- Supporting R&D in key sectors that can provide long-term employment and sustainable future growth, as well as establishing fresh policies to attract foreign direct investment (FDI)
- Removing subsidies from the most carbon-intensive and polluting industries and rethinking agricultural subsidies to boost production and address global food shortages
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Chapter 3
Balancing energy security with decarbonization pledges
The war in Ukraine may prove a spur or a setback to the green energy transition.
According to the International Energy Agency (IEA), the pledges made at COP26 still leave a significant gap in the emissions reductions needed by 2030 to keep the 1.5°C temperature rise target within reach. The war in Ukraine has brought a greater sense of urgency to the task of weaning ourselves off fossil fuels, as countries seek to reduce reliance on Russian oil and gas. The big question is, will the war ultimately prove a spur or a setback to the green energy transition?
Governments are in a difficult double bind: on the one hand pledging to reduce carbon emissions and on the other, bolstering energy sovereignty through fossil fuel exploitation, including using coal as a short-term replacement for Russian gas. We face an unsynchronized transition because renewables are not yet capable of filling the gap. CEOs need a stable policy environment to play their part in accelerating progress toward decarbonization pledges while meeting short-term energy needs.
Boosting energy efficiencies and accelerating the transition
Governments have several different options, such as maximizing generation from existing low-emissions sources. Many experts believe a viable net-zero economy is impossible without nuclear energy: the IEA says the industry must double in size by 2040 to meet emissions targets. While some countries remain skeptical, there is renewed enthusiasm in numerous EU countries, such as France, which wants to build at least six nuclear reactors by 2050.2 Meanwhile the UK plans up to eight new plants by 2030.3
Policymakers can accelerate the transition to renewables, including solar and green hydrogen. Low-interest-rate financing reduces risk for private investors in new technologies, while tax incentives, favorable lending and green bonds give further support. Governments can also increase their own R&D spending. And they can boost energy efficiency by incentivizing households and businesses to install insulation, smart heating and home solar, creating opportunities across a range of industries.
Carbon pricing is a powerful, low-cost mechanism to encourage the green energy transition. Carbon taxes and emissions trading ensure the prices of goods and services accurately capture the social value of the natural resources used in their production, sending price signals to the market to curb emissions globally. But designing the mechanisms requires careful consideration of tax incidence: the principle that those intended to pay the charge may not do so in practice. An internationally coordinated approach would help create fair and efficient carbon-pricing schemes, and facilitate strategic planning for companies.
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Chapter 4
Resetting supply chains to bolster resilience
Policymakers need to secure supplies of essential goods without stifling global trade.
The pandemic and the war in Ukraine have hampered the supply of oil and natural gas, food, agricultural commodities and other critical goods. This is due to disruption to production transportation and logistics, plus trade restrictions on Russian goods.
The reliance on Russia and Ukraine for critical green metals such as palladium, nickel and titanium, as well as neon gas and other chemicals, has hindered the production of microchips, electric vehicle batteries and solar voltaic panels, hitting sectors from automotive to consumer electronics.
More worryingly, the world’s food supply is under threat. Pre-war, Russia and Ukraine together accounted for more than 30% of world wheat exports and nearly 30% of barley.4 Russia was the world’s largest exporter of fertilizer. Now soaring food prices and severe shortages of staple crops, livestock feeds and fertilizer could cause a global food crisis.
In poorer nations, particularly those in northern Africa, Asia and the Near East that have relied heavily on Russian and Ukrainian food and energy imports, businesses, especially multinationals, will want to tread cautiously. These areas could see more extreme poverty, hunger, civil unrest and political instability. Millions more could become refugees.
Since the war in Ukraine started, the world’s food supply has come under threat and a global food crisis could be looming, particularly in poorer nations.
Governments are having to act swiftly to safeguard food security and avoid the worst consequences of critical energy and commodity shortages and price hikes. The challenge is to safeguard their own supplies of energy and vital goods without resorting to protectionism, which could further stifle global trade.
If, as during the pandemic, they introduce export controls, it will put poorer nations at even greater risk. The United Nations is calling for increased international cooperation to even out supply issues, encouraging those who can to produce more. Meanwhile, the agriculture ministers of the G7 group of wealthiest nations have urged countries to keep markets open.
Setting the necessary framework to mitigate vulnerabilities
Longer term, the supply chain vulnerabilities exposed by the pandemic and the war in Ukraine require CEOs to rethink the legacy model of singular, linear, globalized supply chains based on cost efficiency. To improve resilience and reduce external dependence, many governments have been implementing protective policies, such as providing loans and incentives for re-shoring or near-shoring production of essential supplies, as with the Chips Acts for semiconductors in the US and EU that seek to strengthen ecosystems in those regions.
However, CEOs and governments also will want to take the advantages of globalization and regionalization into account. Greater diversification and regional distribution of supply networks can mitigate key dependencies without sacrificing competitiveness. Governments can promote this by preventing anti-competitive consolidation and reducing barriers to market entry. In addition, consumers, employees and investors want better sustainability and transparency within supply chains. Governments can contribute by setting regulatory frameworks and monitoring compliance.
Building resilience to help safeguard the future
The war in Ukraine, following on the back of the pandemic, has intensified the dilemmas facing policymakers. Governments need to act swiftly to address short-term challenges, using a range of policy levers that take account of local conditions and that can be adapted as required. But they must also work to safeguard their longer-term goals.
Businesses in turn will need to be agile in adapting to a fast-changing policy environment. As well as tighter monetary policy, CEOs should expect to see new or strengthened tax policies, aimed at corporations and wealthy individuals. There may be greater controls on public spending, but with temporary relief available for those most impacted by the cost-of-living rises. Governments will prioritize measures that contribute most to sustainable economic growth, including support for companies investing in R&D, future skills development or the green transition.
Companies engaged in global trade should prepare for further disruptions and instability as the full impacts of the war play out. Close collaboration with policymakers will be needed to secure essential supplies in the near term, while safeguarding competitive global markets longer term. Together, governments and business leaders can navigate the current disruptions, while seizing the opportunity to revitalize economies and achieve sustainable and inclusive growth.
Key actions for CEOs
- Given the shifting geopolitical landscape and policy environment, CEOs should consider establishing a cross-functional geostrategy team and prepare to rethink how they manage their global supply chain.
- As part of the effort to help bring rising inflation under control, where possible CEOs should proactively manage their own cost bases and avoid simply pushing higher costs on to the consumer.
- As governments take action to repair their balance sheets, CEOs should work constructively with policymakers to support sensible tax reforms that underpin long-term, inclusive growth and drive competitiveness and productivity.
- CEOs should support governments’ regulatory reforms to competition law and labor market reform in order to help promote long-term competitiveness.
- CEOs should acknowledge their role in keeping the net zero target alive, working with governments to develop sector-specific roadmaps, investing in clean energy and elevating the importance of broader ESG goals.
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Summary
The cumulative impacts of recent shocks present a defining challenge for governments and CEOs. Governments must make sure emergency responses are balanced with policies that safeguard their longer-term goals and build a better future for all. At the same time, CEOs must prepare their organizations to respond not only to the impacts, but to the actions governments take to address those impacts.
