Recession on the horizon?

So how are CEOs responding? First, the prospect of a recession doesn’t come as a surprise to most of the financial services CEOs we spoke with — 76 percent say they anticipated it and have been planning accordingly. They are taking action to weather a downturn while not losing sight of what will drive growth in the long run.

Addressing costs is a must in what looks increasingly like a stagflationary environment. In addition, most financial services CEOs, 86 percent, told us they are managing rising costs both by increasing prices and reducing profit margins. The other side of the coin is productivity, and more than half say they are already focused on improving productivity and another third plan to make productivity a focus in the coming 6 months.

Geopolitical uncertainty is also weighing on the financial services CEOs we spoke with, and most all, 85 percent, are adjusting or planning to adjust their risk management procedures in response to shifting geopolitical dynamics.

Financial services CEOs are clear-eyed about the near certainty of a recession and the impact it could have on their business. But it doesn’t mean they aren’t still confident about the future. In fact, confidence is up from a year ago – 72 percent are confident in growth prospects for the global economy over the next 3 years, 10 points higher than 2021 – and 19 percent are very confident. Even more, 83 percent, are confident about the growth prospects for their business, in line with last year’s level. Though, the level of confidence for their business may have dimmed marginally – the percentage of CEOs who are very confident declined to 27 percent from 35 percent in 2021.

A good indicator of business confidence is M&A appetite, and that remains strong. More than half, 53 percent, of financial services CEOs say they are likely to undertake acquisitions that have a significant impact on their organization. But they aren’t necessarily counting on M&A to drive growth – only 12 percent say it will be an important growth strategy, down from 32 percent in 2021. The CEOs we spoke with say strategic alliances and organic growth are more important to their growth strategies.

Digitization and emerging technologies are both a threat and opportunity for financial services CEOs. On the one hand, they identify emerging and disruptive technology as the greatest threat to growth. But at the same time, advancing digitization across all functional areas ranks as the top operational priority for financial services CEOs to achieve their 3-year growth objectives.

There is a strong consensus that driving digital transformation at a rapid pace is critical to the competition for talent as well as customers (72 percent agree). Digital agility is seen as essential – the majority say they need to be quicker to shift investment into digital opportunities and divest from areas where there is digital obsolescence

With the uncertainties today, everything is on the table for financial services CEOs, even areas they know are critical for long-term success. Many, 44 percent, have paused or reduced their digital transformation strategy and another 35 percent expect to do so in the next 6 months.

A cautionary note is that many, perhaps too many, are satisfied with where they are in their digital transformation journey – three-quarters are content with their progress and say they are now allocating resources to other areas. Many indicate that there is burnout from their accelerated digital transformation over the past 2 years that needs to be addressed before continuing.

Financial services CEOs appreciate more than ever the importance of attracting and supporting the right talent to drive their business and digital transformation. They are balancing the need to manage costs in the current environment with ensuring they have the skilled workforce they need for the future.

In the short run, the majority (74 percent) have implemented a hiring freeze or expect to do so in the next 6 months, while even more (80 percent) have, or expect to, consider reducing their workforce. But looking out over the next 3 years, the vast majority, 84 percent, expect to add to their organization’s workforce – just 6 percent expect their headcount to decrease in that timeframe.

Three-quarters of financial services CEOs told us that challenges such as income inequality and climate change are a threat to delivering long-term growth and value. This is indicative of the greater focus on societal issues. Financial services CEOs are seeing greater demand from their stakeholders for increased reporting and transparency on ESG issues. And an equal number of CEOs agree that shareholder scrutiny of their performance on social issues will continue to accelerate.

As financial services CEOs look to accelerate their ESG strategy in the next 3 years, taking a more proactive approach to societal issues such as human rights and investment in living wage is seen as a key driver. With increasing measurement and governance, delivering an actionable inclusion, diversity and equity strategy, and implementing a net zero or other carbon reducing strategy are also seen as key priorities.

Financial services CEOs face some daunting challenges in the months and years ahead. The economic and geopolitical landscape is shifting rapidly. It is encouraging to see financial services CEOs are not just stepping up to the current economic challenges but also sharpening the focus on what will drive growth in the longer term. It is heartening to see they are prepared to weather some difficult times straight ahead while still maintaining confidence and anticipating long-term growth.