Governance, risk & compliance A taste for risk
A single word is stalking corner offi ces and C-suites across Europe: recession. Combined with soaring infl ation and stagnating wages, fi nance bosses have plenty to worry about – but the situation is not hopeless. Abi Millar talks to Charlie Steel, CFO of Babylon Health, to understand how executives are preparing for the challenges ahead – and how choppy economic waters could be the perfect opportunity for thorough changes in how companies are run.
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t has become a cliché at this point to say we are living in ‘unprecedented economic times’. In 2020, the Covid-19 pandemic plunged the global economy into a sharp, albeit short-lived, recession, with most countries seeing a dramatic plunge in GDP. While economies rebounded from the initial shock, recovery has been muted overall. Global growth, which stood at 5.7% in 2021, is projected to slow to 2.9% this year. And, if warnings from the International Monetary Fund are anything to go by, that might not be the worst of it. Amid crippling energy shortages, record levels of inflation and rising living costs, many of the world’s leading economies could be on the brink of yet another recession.
In August 2022, the risk of a euro-area recession reached its highest level since November 2020, according to economists polled by Bloomberg. With inflation across the bloc averaging 8% this year, the European Central Bank (ECB) has responded by tightening monetary policy, hiking up interest rates for the first time in 11 years. In the UK, the situation is even starker. Here, inflation is expected to rise as high as 13%, and interest rates have now reached 3%. The Bank of England has warned that the UK economy will contract in Q4 2022, before dipping into recession for the whole of 2023.
Preparing for the worst
Charlie Steel, CFO, Babylon Health
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What that means for businesses remains to be seen – but it’s clear that Europe’s finance leaders
are keeping an eye on the risks. In a survey of UK CFOs, conducted in June by Deloitte, respondents said it was more likely than not that we’d experience a recession within the next year. The vast majority (87%) said operating margins would be squeezed over that time, while 61% said the level of uncertainty facing their business was ‘high’ or ‘very high’.
Ian Stewart, chief economist at Deloitte, commented: “Finance leaders have edged towards more defensive balance sheet strategies, particularly cost control and building up cash.” All the same, Stewart also remarked that CFOs are not quite in ‘batten down the hatches mode’, adding that risk appetite “is only slightly below average levels, and well above the lows seen in the financial crisis, at the time of the EU referendum and during the pandemic.”
In other words, the picture is mixed. While input costs have risen significantly, with credit seen as expensive, many CFOs have retained their appetite for investment. Strikingly, more than half (54%) expect revenues to rise over the next year. Charlie Steel, CFO of Babylon Health, suggests that some businesses will be better positioned to ride out a downturn than others.
“Financial markets have rapidly shifted away from growth and towards value investing,” he says. “So for those businesses that need to raise capital, that presents a significant challenge, because the cost of capital has increased massively. At the same
Finance Director Europe /
www.fi nancedirectoreurope.com
Dilok Klaisataporn/
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