On the one hand, the declining birthrate and the shrinking population of working age people in many countries present challenges to finding sufficient manpower to staff factories and offices to meet existing demand. Companies and governments alike are struggling to find ways to keep their older workers on the job longer. But perhaps more important for CFOs and executives mapping long-term strategies, the aging population today is healthier and wealthier than in the past and holds huge potential as a market for new products and services.

Companies faced with slack demand for such things as diapers and baby food are rolling out incontinence products and protein drinks to support aging bodies. With many aging individuals remaining healthy into their 90s, demand is increasing for everything from travel programs aimed at older audiences to aesthetic surgery to remove double chins and wrinkles. As the TV program The Golden Bachelor has demonstrated in the US, demand for dating services for people over 65 is soaring.

“Globally, this age group is the most important consumer growth market over the next 15 years,” advertising firm Ogilvy says. “Developed economies are already experiencing the huge spending power of the elderly. Asia will be no different—with the exception that the demographic changes in Asia will mean that it happens even faster in Asia.”

The cause of this business rethink is a truly striking demographic shift: The World Health Organization forecasts that the proportion of the global population over 60 years old will nearly double between 2015 and 2050, reaching 2.1 billion people. The shift is even more acute in a handful of countries: According to the World Bank’s figures, as of 2022, 30% of Japan’s population was 65 or older, while in Italy it was about 24%, prompting Prime Minister Giorgia Meloni to lament that the country is “destined to disappear.” In China, while still a relatively low 15% of the population, about 210 million people are currently over the age of 65, according to a 2023 Chinese government report—a consumer market nearly the size of Brazil’s entire population. In China and many other countries, the fastest-growing demographic is over 80.

While in the past, older consumers were often ignored because they subsisted on pensions and didn’t spend their savings as much as younger cohorts, that picture has changed dramatically as well.

“If you ask where the money is—in America, 70% of disposable income is held by people 60 and over,” says Michael W. Hodin, CEO of the Global Coalition on Aging. “Where is the business opportunity? In China, Japan or across Europe, the data points are the same.”

For example, total disposable income in the Asia-Pacific region is expected to more than double between 2021 and 2040, according to research firm Euromonitor International. “Seniors’ consumption may grow twice as fast as that of the rest of the population in many Asian countries,” says consulting firm McKinsey in a 2021 discussion paper titled “Beyond Income: Redrawing Asia’s Consumer Map.” The authors add that “by 2030, more than 95% of seniors in Australia, Japan and South Korea are expected to be online,” while “the share in China could exceed two-thirds” of the over-60 population.

The significance of the enormous elderly market in China was underscored when the government in Beijing released a white paper in January titled “Opinions of the General Office of the State Council on Developing a Silver Economy to Improve the Wellbeing of the Elderly,” with a comprehensive program to ramp up senior-focused support systems, services and infrastructure, as well as products focused on the elderly.

In addition to broadening consumption and supply channels for the elderly, the government says it will boost research into clothing, shoes and hats specifically for the aging consumer and help develop health food products “suitable for the chewing, swallowing and nutritional requirements of the elderly,” as well as “suitable” literature, sports events, TV programs and other entertainment options.

While the new program will provide investment funding, the private sector in China has been focused on the aging segment for some time. “In recent years there has been a spike in the availability of products and services aimed at the aging consumer, especially for things like nutrition products, personal health and adult diapers,” says Viktor Rojkov, assistant manager of the international business advisory team at consultancy Dezan Shira’s Shanghai office. He estimates the senior market size at $680billion-$700 billion.

Shanghai has an elderly population of 5.6 million out of about 30 million in total. As in other major Chinese cities, many elderly had worked in export-based factories for decades, accumulating savings, and now had substantial disposable income to spend on new products, Rojkov says. One reason Chinese consumers are switching to online shopping, he says, is a “shame factor” for buying embarrassing products like hearing aids and adult diapers in crowded stores.

To help facilitate online shopping for this crucial cohort, companies such as Easyfone have introduced a number of mobile phone models specifically designed for older adult users, with louder volume, larger displays, simpler interfaces, optional photos instead of numbers for speed dialing, and built-in health monitoring.

Indeed, because Japan and South Korea also have large elderly populations, phone manufacturers in those countries are increasingly turning out products specifically for that audience. Japan’s Panasonic, for example, has produced a smart stick, an intelligent cane that helps provide balance assistance and sends alerts if the user falls.

In the same context, Japan’s GLM, a Kyoto-based manufacturer of electric vehicles, produces an advanced mobility scooter that is “not just a vehicle for the elderly, but a car that makes people want to drive it, even if they have to give up their car license,” according to Fortmarei, who designed it, although the elderly might be challenged riding it as well.

It’s no coincidence that these products are aimed at the only consumer segment growing in Japan. Consumers ages 60 and older accounted for 48% of Japan’s overall personal consumption as of 2015, growing at an average rate of 4.4% per year between 2010 and 2014, according to nippon.com. Spending by households headed by someone under 60 actually declined by an annual average of 1.9% between 2003 and 2014, says the nippon.com report.

Japanese companies have responded by producing things like washing machines and microwaves that are voice operated and smaller, to match the reduced stature of aging consumers.

One of the biggest areas for growth is the market for nutrition products aimed directly at the aging. According to Polaris Market Research, the global market for these products, valued at $18.5 billion in 2022, is expected to experience compound average annual growth of 6.5%, reaching $30.6 billion by 2030. It’s no wonder that Abbott Laboratories said in 2022 that it was discontinuing its infant nutrition products in China and will replace them with adult nutrition.

Companies are also looking at beauty products focused on older women. For example, SK-II is a luxury Japanese cosmetics brand owned by multinational Procter & Gamble that uses a yeast found in the brewing of sake as a special anti-aging ingredient.

Ron Robinson, CEO of New York–based BeautyStat Cosmetics, says his firm is focused squarely on the aging market. The company is producing a moisturizer that contains two peptides that work to relax the look of expression lines and wrinkles, providing an alternative to Botox injections.

“With this launch, we are showcasing older female consumers and showing them in a sexy, exciting, vibrant way,” Robinson says. “Our research shows that women in the 50-plus group have the most disposable income, and that’s why we’re focusing on them.”

Another major issue companies face from the demographic shift is a marked decline in the number of younger people entering the workforce to replace retiring employees. In Germany, for example, the country is losing 700,000 workers a year who are not being replaced, says Erik-Jan van Harn, an analyst at Rabobank.

To encourage workers to stay on the job longer, carmaker BMW offers employees a range of health benefits designed to keep them fit, including physiotherapy at the factory. In 2019, BMW introduced its Senior Experts Program to enlist retired employees with specialist experience or years in management positions to mentor younger employees for up to several months.

Singapore, where almost a quarter of the population is expected to be over 65 by 2030, also faces a similar problem of a declining workforce. Finance Minister Lawrence Wong said in a 2021 speech that the aging of society was one of the country’s greatest challenges. He pointed out that the government was giving grants to incentivize companies to employ older workers, and at the same time it was raising the retirement age. It has also urged companies to shift away from labor-intensive manual manufacturing processes in preparation for a future workforce squeeze.

“The demographic curve may be inevitable, but it is a window of opportunity, too,” Wong said. “It is on us to find the silver lining.”

A similar problem exists in Japan but on a much bigger scale. By 2045, Japan’s population is expected to decline from its current 123 million to 107 million, according to Rajiv Biswas, chief Asia-Pacific economist for S&P Global Market Intelligence. “Japan is trying to do economic reforms to increase the female participation rate in the workforce to try to mitigate the impact of aging demographics,” he says. “But it’s very difficult when you have such large declines. And the other problem is that because there’s a lack of young people entering the workforce, you have issues because there’s not enough young people to look after this very large increase in the amount of elderly.”

As a consequence, it is no surprise Japan leads the world in the production of industrial robots designed to seamlessly replace humans in factory production lines. In 2022, Japan produced 46% of the world’s robots, compared with 29% in China and 16% in the US.

The other side of the coin is that with improved health care, medical breakthroughs, and expanding life expectancy, many workers will need to work longer to cover the cost of their retirement years.

“If people keep retiring in their late 50s, but are hoping to have longevity until their 90s, that means that over half of their eligible life they will not be working,” says Abby Miller Levy, managing partner at Primetime Partners, a venture capital firm investing in products and services for older adults.

Perhaps because of the costs, roughly a fifth of Americans ages 65 and older were employed in 2023—nearly double those who had a job 35 years ago, according to the Pew Research Center. Pew says 62% of older workers are working full time, compared with 47% in 1987.

One growth area Levy mentions is startups such as 55/Redefined and Rest Less in the UK that work to find older workers jobs or help companies present their employees with career paths long before they reach the normal retirement age, to extend their time in the company.

Peter Hubbell, CEO of marketing consultancy BoomAgers, which focuses on the elderly, says that many big firms have been slow to grasp the enormous potential opportunity in the over-65 market because of a cultural bias favoring youth over age. “All of the marketing best practices, tools and techniques were developed and optimized for the 18-to-49 cohort, and they have never really known how to market for the 50-plus segment,” Hubbell says.

He adds that companies need to “embrace the fact that there is a significant business opportunity here and that we can’t write off people because they are north of 50. Old people aren’t old anymore—they are people with money who are determined to live active, vital lives and be recognized and appreciated.”

Conventional economic wisdom holds that countries with strong currencies underperform those with weaker currencies because a strong currency makes manufacturing less price competitive. But the world has been turned upside down by the Covid-19 pandemic, the fight against inflation, and a potentially explosive Middle East conflict: The US economy grew at a surprisingly robust 4.9% in the third quarter despite a strong dollar, while Europe entered a technical recession and China saw evidence of deflation and crumbling growth.

Welcome to the two-speed global economy: The US appears to be going from strength to strength, despite the vigor of its currency, while Europe and Asia are slowing. What is the explanation for this apparent paradox? The most likely reason is simple: consumer sentiment. Although the pandemic affected consumers all over the world, and many governments responded with financial stimulus, consumer sentiment has since diverged sharply. Why is this important? The consumer accounts for two-thirds of US GDP and more than half of European growth.

“We do see a notable drop-off [of sentiment] in the UK and the euro area [around the same time as the start of the Russia-Ukraine war and ensuing energy price increases] with no equivalent fall in the US,” Joseph Lupton and Maia Crook, analysts at JPMorgan, said in a June note to clients. “With so much heightened uncertainty in Europe, households could be engaging in ‘precautionary saving,’ more so than in the US.”

The result has been dramatic: Consumer spending has increased in the US every month of 2023, up 0.7% in September alone, according to the US Department of Commerce. On the other hand, retail sales declined in the euro area by 1.8% year over year (YoY) in September, with overall consumer spending registering a fall between June and September, according to Trading Economics.

“I think a key driver of US economic resilience this year has been consumer spending that has driven the economy higher,” says Ginger Chambless, head of research for Commercial Banking at J.P. Morgan. “There are also indications that US consumers are acknowledging a little more relief from inflationary pressures than their counterparts in Europe.”

Another important factor in the split between economies is that the Federal Reserve raised interest rates to a range of 5.25% to 5.50%, from near zero in 2022, causing the value of the US dollar to soar against a basket of other major currencies. Since commodities are largely priced in dollars, companies in Europe and Asia felt a big pinch in the pocketbook.

To be sure, while a strong dollar may benefit US shoppers, the strength of the greenback is hurting US multinationals that repatriate overseas profits. According to financial data firm FactSet, companies in the S&P 500 that earn more than 50% of their revenue outside of the US saw their revenue decline by an average of 4.7% in the third quarter. Apple, for example, said in August that the dollar’s strength had cut four percentage points from revenue. UPS said in September that its international revenue had declined 13% compared to the previous year, in part because of higher fuel costs and the dollar’s strength.

To further split the US and other economies, Russia’s invasion of Ukraine sent prices for oil and natural gas higher. As an energy exporter, the US is largely immune to the problem. Europe, on the other hand, had received most of its energy from Russian suppliers, now embargoed. Since war also broke out in the Middle East in October, companies around the world have worried that the new conflict might push energy costs even higher.

One other headwind for Europe is that the continent’s business depends on exports to generate a quarter of GDP, far more than in the US. And Europe’s biggest export customer is Asia, especially China, whose imports have fallen sharply as a result of a slowdown in its domestic economy.

China’s downtrend was especially surprising, because it had earlier registered very high growth rates as it became the “workshop to the world” and threatened to overtake the US economy as the world’s largest. That prospect seems more remote now that GDP growth on the mainland slowed to 4.9% in the third quarter from 6.3% in the previous three months.

Why is 4.9% a sign of health in the US but weakness in China? It’s the trend lines. US GDP growth is trending upward. But while the International Monetary Fund (IMF) sees the Chinese economy improving slowly, reaching 5.4% GDP growth this year, it expects a slowing to 4.6% next year, due in large part to weakness in the property market and subdued external demand. This represents an upward revision from the fund’s earlier forecasts. The relatively upbeat IMF study came after China’s financial authorities announced a package of stimulus measures in October, including issuing $137 billion in sovereign debt for infrastructure projects, an increase in the country’s budget deficit, interest rate reductions, and lower mortgage costs to help the beleaguered property sector.

One worry is that consumer prices in China declined by 0.2% in October, raising concerns about possible deflation. This is in sharp contrast to the US and Europe, where fighting inflation has been the biggest concern. On the other hand, Japan, which has been fighting deflation for two decades, has finally managed to produce a slight burst of inflation because of higher import costs.

“While headline inflation in China remains low, this largely reflects lower food and energy prices,” says Siddharth Kothari, a senior economist in the IMF’s Asia and Pacific research department. “In our baseline forecast, we do not expect persistent consumer price deflation in China. The expectation is that inflation will pick up as the drag from commodity prices wanes and economic activity recovers gradually.”

In addition to falling consumer prices, Chinese shoppers are increasingly reluctant to open their pocketbooks. US cosmetics firm Estee Lauder, for example, reported that operating income fell 85% from a year earlier because of an 11% decline in sales, mainly in China and the rest of Asia.

The Chinese yuan has also declined by 5% against the US dollar this year, which should have boosted exports; but US imports from the mainland in the first nine months of 2023 were 24% lower than the comparable period of 2022. A lower yuan makes imports of commodities such as oil and coal more expensive. One solution has been for China to strike a deal with Russia to import oil at discounted prices.

Apart from the property crisis, China’s decline in exports has affected countries across the Asian region that supply China’s manufacturers. China’s overall exports fell for six straight months in 2023, with exports to Southeast Asia and the EU in October falling by double digits and shipments to the US down about 8%.

“The rapid growth of China was a very important driver for Southeast Asian exports for things like commodities and intermediate goods, and even tourism,” says Rajiv Biswas, chief economist for the Asia-Pacific region at S&P Global Market Intelligence. “All of those things have become a growth drag for China, so demand for Southeast Asia exports will be more moderate.”

Nonetheless, Biswas contends that the outlook for Southeast Asian exporters will improve because of two factors: the rise of India, with growth of 7.2% last year and a projected 6.3% in 2023, as a competitor with China; and domestic growth in Southeast Asian markets favoring local companies.

One indicator of how much China’s anemic growth has affected global trade was the announcement by Danish shipping giant A.P. Moller-Maersk in early November that it had a sharp fall in revenue in the last quarter and was laying off 10,000 employees. Container ships are used to bring Chinese exports to the US and Europe, as well as Mercedes-Benz cars and wine from Europe to the US. “If the fourth quarter does not deliver some type of improvements, then I think we’re looking at a pretty dire situation in 2024,” Maersk CEO Vincent Clerc said at the time on an earnings call with analysts.

Because Chinese firms that make electric vehicles (EVs) have been struggling to increase sales at home, they have been exporting excess capacity to Europe, where hard-pressed consumers appreciate the high quality and low price tags of the Chinese EVs. China exported two million cars in the 10 months ended October 2023, overtaking South Korea and closing on Japan’s auto shipments. This has raised hackles in Europe, where automobiles are big business, with the EU announcing on October 4 that it had launched an “anti-subsidy probe” of EV imports from China. Punitive tariffs are being considered.

The European Commission (EC) says China’s share of EVs sold in Europe has risen to 8% of the total, with prices that are often 20% less than comparable European models. “Global markets are now flooded with cheaper electric cars. And their price is kept artificially low by huge state subsidies,” said EC President Ursula von der Leyen in September in her annual address.

Europe’s concern came after the continent entered a technical recession at the beginning of the year, when growth slumped by 0.1% for the second consecutive quarter. The IMF said in its Regional Economic Outlook for Europe, published in November, that growth in the region is expected to eke out an anemic 1.3% GDP growth in 2023 and improve only marginally to 1.5% next year.

“Within advanced European economies, service-oriented economies will recover faster than those with relatively larger manufacturing sectors, which face low external demand and are more exposed to high energy prices,” says the IMF analysis.

For instance, China has been Germany’s main trading partner for seven years, but Germany’s exports to China declined by 2.3% in November after a 4% fall in the first quarter, according to the Kiel Institute for the World Economy. In addition, the war in Ukraine has impacted German businesses because Russia once provided cheap natural gas that powered many industries, but now supplies have been curtailed by sanctions against Moscow.

Worryingly, the quarterly survey of bank lending in the eurozone by the European Central Bank (ECB) showed that demand for loans by companies wanting to make investments has fallen off a cliff. Demand for loans by firms fell 36% in the third quarter, following a 42% decline in the second quarter, nearing the low level at the height of the 2008 financial crisis. High interest rates and a decline in fixed investment were mainly to blame, the ECB says.

In an effort to support German business, the government of Chancellor Olaf Scholz in November unveiled a package of tax subsidies worth up to about $30 billion over the next four years. “The federal government is massively relieving the burden on manufacturing in terms of electricity costs,” said Scholz; but this may face opposition from other European countries opposed to government intervention in the economy. Germany is Europe’s biggest economy, with GDP of $4 trillion, while second-place France comes to only $2.8 trillion.

In late October, Italian Prime Minister Giorgia Meloni announced a €24 billion (about $26.2 billion) package of tax cuts and increased spending on things like pensions, government contracts, and the country’s health system, all designed to boost the economy against headwinds like higher energy prices.

Looking ahead, one of the biggest concerns for global companies is the risk of higher oil prices because of the war between Israel and Hamas that began October 7th. A survey of global firms by analysis firm Oxford Economics shows that nearly 60% of companies say they view the conflict as a “very significant risk.”

However, Jamie Thompson, head of Oxford’s Macro Scenarios, says that the impact of a disruption to oil supplies would be a lot less damaging to companies now than many people think. Even in a severe scenario of oil prices rising to $150 a barrel from the current $82 for Brent crude, he says, the global economy would be less vulnerable to an oil-supply shock than it was after the 1973 Yom Kippur War.

“A key part is the energy intensity of output has fallen massively over the decades,” Thompson says, adding that many advanced economies now generate more revenue through services than manufacturing, requiring less energy.

However, not everyone agrees with this scenario. “Europe is in a very bad situation because we are net importers of energy,” says Erik-Jan van Harn, macro strategist at Rabobank Global Economics & Markets in the Netherlands. He says that if the Russia-Ukraine war escalates to a regional conflict, Europe could see a spike in energy prices more damaging than the initial surge when hostilities commenced. “Last time around, we had low interest rates, we had a lot of public finances that could be used to ease the blow, and we had consumers with pandemic savings,” he points out. “But now the savings have gone and governments are curbing their spending.”

The ultimate outcome in the Israel-Hamas conflict remains unclear, but the lack of escalation to neighboring countries or a boycott by Arab exporters has seen the price of Brent crude, the oil benchmark, fall from a spike that reached about $92 a barrel on October 19 to about $82 a month later.

While European consumers were traumatized by the outbreak of the Russia-Ukraine war and the sharp increase in energy prices—Europe now gets a substantial amount of oil from the US and Qatar rather than Russia—that may soon be easing. In fact, Europe’s inflation slowed dramatically to 2.9% in October, the first time it has been below 3% since the summer of 2021. If consumers begin to feel more optimistic, they may start reducing their “precautionary savings” and resume buying at Europe’s stores. And that would be good for the global economy.

Tech giant Salesforce gave up half of its namesake skyscraper in San Francisco in 2022, later abandoning the entire building. British banking and financial services group HSBC told employees it is leaving its iconic 45-story office tower in the Canary Wharf district for a smaller building in central London. In Shenzhen, China’s tech-dominated city of 13.1 million, companies have bolted from offices, sending the vacancy rate to a record 24.5%. Retail giant Alibaba alone laid off 19,000 employees.

Investment in French office buildings was down 54% in the fourth quarter compared to the previous year, the lowest level for a fourth quarter since 2013, according to real estate firm Knight Frank. In Brussels, even the European Union has announced plans to cut back its vast office space by a third.

Companies around the globe are scrambling to downsize their real estate costs as their needs shrink, mainly in office buildings occupied by workers in the “knowledge economy” but also in retail and warehouse space. Driving the abrupt shift is an unusual confluence of factors: Remote working has proven surprisingly durable even after the relaxation of Covid-19 restrictions; the recent surge in interest rates has heightened focus on cost cutting; and a slowing global economy has forced many, especially in the tech sector, to retrench. An additional factor is climate change that is spurring many companies look for ways to reduce their greenhouse gas emissions to net-zero.

CoStar Group, a real estate research firm, reckons that 13.1% of office space in the US is vacant, the highest vacancy rate it has ever recorded; in tech-heavy San Francisco, the rate is 25.7%, according to professional services firm Colliers International. In addition, there is “a super high phantom vacancy rate” nationwide, meaning tenants have moved out but are still paying the rent on the remaining lease, CoStar CEO Andy Florance told CNBC in July.

For corporate CEOs and strategists, urban politicians and planners, and millions of rank-and-file working people, the critical issue is whether the retreat from the world’s steel-and-glass jungles is permanent. A 2023 survey of human resources executives by the Conference Board found that 56% of employees in the US continue to work remotely at least part of the time, and 76% of professional and office workers are still working hybrid or remotely. This is described as part of a “new normal.”

“Although there are variations across cities and sectors, this is really a global phenomenon grounded within the knowledge working economy and has broad social import,” says Phil Kirschner, associate partner in McKinsey & Company’s real estate practice, who has written about the changing office environment. McKinsey recently published a study of this issue entitled Empty Spaces and Hybrid Places: The Pandemic’s Lasting Impact on Real Estate.

Remote Work Spreads

Hybrid working arrangements—usually one or two days a week working from home or somewhere other than an office—began gaining ground years before lockdowns became a problem, McKinsey found. The trend started in laid-back Australia and then moved to Europe before taking ahold in the US.

As hybrid arrangements have gained acceptance worldwide, many companies that had assigned a desk or an office to individual employees began adopting strategies like “hoteling,” “hot desking” or “neighborhoods,” where employees instead work at any available desk when they are in the office. These companies then needed only about 60% to 70% of their existing floor space and began sharply cutting back on their leases. Ryan Luby, an associate partner at McKinsey and co-author of the Empty Spaces report, says the expansion of hybrid work is visible in data. “The density of workers in offices at the global level [came] faster than [the density] in firms with traditional occupancy.” Today, “not having someone around isn’t a big deal anymore,” he adds.

What are the long-term implications of remote work? Some companies view downsizing real estate not as a short-term rent saving but a matter of resilience and competitiveness. Nationwide Insurance, the eighth-largest home insurer in the US with 25,000 employees, announced in April 2020 that it would retain four large central hubs and close its smaller office campuses in Florida, Pennsylvania, North Carolina, Virginia, and Wisconsin. “Our goal is to ensure that when a recovery comes, we’re prepared to win business with competitively priced solutions while enhancing our resiliency and operational efficiency,” Nationwide CEO Kirt Walker said at the time.

Another reason some companies in the US and elsewhere are cutting back on office space is that their business is slowing, thanks in part to efforts by the Federal Reserve and other central banks to curb inflation by raising interest rates. The US tech sector has eliminated more than 150,000 jobs in 2023 alone.

A cultural geography of hybrid work arrangements is starting to reveal itself. English-speaking nations are the greatest adopters. A study by WFH Research, the Global Survey of Working Arrangements, found that employees worked from home an average of 1.4 days per week in Australia, Canada, New Zealand, the UK, and the US, but only 0.7 days per week in Asian countries, 0.8 days in Europe, and 0.9 in the four Latin American countries that the study’s authors measured.

In Asia, for example, corporate employees tend to live in dense city centers rather than commute from suburbs, and crowded home conditions make working in an air-conditioned office more attractive than trying to work from a dining room table, says McKinsey’s Luby. On the other hand, zero-tolerance Covid policies encouraged working from home, as many workers worried about being trapped in an office lockdown for weeks should one of them test positive, says Nicholas Chen, Chinese Corporates analyst at research firm CreditSights in Singapore.

Discounts and Upgrades

Companies that see in this new world of work fresh opportunities to benefit the bottom line are eager to embrace them. Last year, JPMorgan Chase CEO Jamie Dimon made headlines when he told shareholders the bank was planning to provide space for just 60 to 75 employees out of 100 on any given day. About half the staff would work full time, 40% would be hybrid, and 10% would be permanently remote. The bank’s new headquarters building at 270 Park Avenue was designed with a 60% formula for available seats using “flexible” working arrangements.

Salesforce, which went from 49,000 employees at the start of 2020 to 79,000 at the end of 2022, laid off more than 8,000 in January and has announced further layoffs in August. In addition to its San Francisco headquarters building, Salesforce gave up the headquarters building of its Slack subsidiary and exited hundreds of thousands of square feet of space at two other office blocks.

“Over the past two years, we have continued to reimagine our real estate strategy,” President and CFO Amy Weaver said on a December earnings call. “That is not only to optimize for scale but also continue the hybrid work environment and how people are working and how they’re using their space. And this has included reducing our footprint fairly significantly right now.”

Many companies now face three choices, according to Julie Whelan, global head of Occupier Thought Leadership and Research at commercial real estate firm CBRE: to consolidate core workforce in existing office space, find new quarters either at cheaper rates or in better equipped facilities, or expand the use of flexible working arrangements for non-core staff. “Blanket arrangements are not working,” she says.

If the downsizing trend continues, what will it mean for commercial real estate values—and the deals tenants can expect to be offered? The value of office buildings as assets declined by nearly 40 percentage points in 2020, according to the National Bureau of Economic Research; and research by Stijn Van Nieuwerburgh, professor of real estate and finance at Columbia University’s Graduate School of Business, projects a possible 43.9% drop by 2029 below 2019 average office values. This has some landlords walking away from mortgages.

But the pressure on asset values has led to significant rent reductions and more free extras from landlords. Commercial tenants have greater flexibility on lease terms, with the standard term of seven years now down to two years in some cases.

In Hong Kong, foreign banks and other businesses that once managed their Chinese investments from the city have been leaving in droves because they can now perform the same tasks in Beijing or Shanghai using local employees rather than expats. The vacancy rate for A-class Hong Kong office buildings passed 15% by July, three times pre-pandemic levels, and rents have dropped nearly 40%.

Some companies are shifting into more-luxurious quarters, according to Whelan. Typical office buildings are rated either A, B, or C class, but a new category of super luxury A+ buildings is attracting some tenants with deep pockets. This is in part an attempt to coax reluctant employees to come back to the office. The Conference Board survey found that 73% of companies reported difficulty enticing workers back to the office.

At the other end of the spectrum, many companies that rent office space in the lowest category of building for lower-wage operations like call centers and customer support have turned the work-from-home trend to their economic advantage by requiring employees to do their jobs remotely. Many are glad to work at home full time, and the companies save on office outlays.

Bottom-line savings are not the only driver, however; the response to climate change is a considerable factor as well. HSBC, the world’s eighth-largest bank by assets, says its new, smaller office location will help to meet its commitment to achieve net-zero greenhouse gas emissions. The towers at Canary Wharf that HSBC and other giants have long occupied “were built for big offices and trading floors; but now those offices and trading floors are no longer needed, and the banks realize they need less space than they used to,” says Mark Stansfield, senior director of UK Analytics at CoStar: “Companies now prefer more environmentally friendly space in more-central locations to attract staff into the office a bit more.”

The UK and EU governments have imposed regulations requiring buildings to reduce emissions, now accounting for more than 30% of greenhouse gases. In the US, 40 of the 50 largest cities have announced preliminary plans to transition to achieve net-zero over time. New York City’s Local Law 97, going into effect in January, will assess heavy fines on polluting buildings. Most of the emissions come from aging air-conditioning and heating systems.

Finding the Bright Side

As the trend away from a larger office footprint unfolds, uneven patterns are emerging. In France and Germany, where hybrid work is also spreading, companies are cutting their office-space requirements. Automaker Renault, which has leased its headquarters in the Paris suburb of Boulogne-Billancourt for decades, announced in 2021 that it will move to smaller quarters in 2025 and cut its office footprint 50% as part of a plan to save $2.5 billion a year.

The outlook in Germany is brighter, with rentals increasing even though investment in new office buildings has been flat for more than a year. “The labor market is robust, land continues to be scarce, and sustainable property developments are in high demand,” says Jan Finke, project manager for the Berlin-based Bulwiengesa Real Estate Index, in Bulwiengesa’s January report.

Some firms in Asia are using the opportunity created by remote work to upgrade spaces. Standard Chartered Bank, whose business is mainly in Asia, Africa, and the Middle East, announced, also in 2021, that it will reduce its office locations around the world from 776 to 400 and reduce global office space by a third, under the slogan “Twice the experience in half the space.”

Standard Chartered’s offices in Taipei show how the bank is implementing its plans. As office-data firm Leesman describes it, Standard Chartered consolidated three Taiwan offices that had limited communal spaces and segregated departments into a new state-of-the-art headquarters that provides space allowing “seamless collaboration, better flow within the building, and more integration within traditionally siloed departments.”

The building features rejuvenation areas; quiet zones with massage chairs; an entertainment area with a basketball arcade, punching bags, and dartboards; a dedicated mothers’ room; and a medical center.

It remains to be seen whether these features will drive collaboration, innovation, or profits. There’s no telling how workplace practices will continue to evolve, but investments such as these suggest that companies around the globe are aiming to make their reduced office footprint permanent.

The banking crisis that swept through global markets earlier this year was at an end, Federal Reserve Chairman Jerome Powell declared in May. And indeed, the ripples from the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank appear to have settled out. But for many companies trying to raise financing, their own crisis with banks may have just begun.

For many reasons—high interest rates, tighter lending conditions, slowing growth—companies in the US, Europe, and Asia are struggling to secure capital for new investments or to roll over existing debt.

“Our impression is that it is getting more difficult for companies globally to get financing,” says Jamie Thompson, head of macro scenarios at Oxford Economics in London. “We’re expecting tightening credit conditions for businesses to continue and for that to weigh on demand. At the same time, we don’t see the peak impact from US interest-rate raises until next year, so we are really at the start of the problem.”

Multiple surveys, in the US and beyond, are telling much the same story. When Oxford Economics surveyed businesses globally about their perceptions of forthcoming risks, executives responded that “banking system strains and tightened credit supply” now pose the greatest threats to the global economy.

The Federal Reserve’s April Loan Officer’s Opinion Survey on Bank Lending Practices provided a clear indication of how difficult it has become to get financing.

“Over the first quarter, significant net shares of banks reported having tightened standards on [commercial and industrial] loans to firms of all sizes,” the Fed report said. “Tightening was most widely reported for premiums charged on riskier loans, spreads of loan rates over the cost of funds, and costs of credit lines. In addition, significant net shares of banks reported having tightened the maximum size of credit lines, loan covenants, and collateralization requirements to firms of all sizes.”

Goldman Sachs regularly surveys US small businesses to assess their financial position. In the latest Goldman survey, 17% of small businesses reported having applied for a new loan in the last three months, but two-thirds of these “found it difficult to access affordable capital.”

The American Bankers Association found much the same thing. The ABA publishes a quarterly report on credit conditions in the US Members of the association’s economic advisory committee, in their latest report, “expect business credit availability will deteriorate in the next six months, and most expect business credit quality to deteriorate.”

US firms that rely on issuance of high-yield bonds to finance investment are feeling the squeeze especially keenly. The size of the so-called junk bond market has fallen 11% overall since its peak in 2021, as interest rates have soared from around 4% to nearly 9%. This, along with high interest rates and a slowing economy, have pushed up defaults in the US junk bond market dramatically: to $21 billion in the first five months of 2023, according to data firm PitchBook, more than the total in 2021 and 2022 combined.

Some companies are taking the cue to deleverage. Carnival Cruise Lines, which boasts a market capitalization of $19.7 billion, decided against rolling over existing debt on account of the sky-high rates on bonds. Instead, it used cash on its balance sheet to pay down the debt.

“We believe we are well positioned to pay down near-term debt maturities from excess liquidity and have no intention to issue equity,” CEO Josh Weinstein told analysts on a March earnings conference call.

M&A activity also has slowed to a halt because private equity firms can’t arrange the financing for leveraged buyouts.

Tough All Over

One key difference between the US and Europe is that US-based companies tend to raise money through the capital markets while European companies predominantly borrow from banks. But European companies are feeling the same pressures as their American counterparts.

The European Central Bank said in its May 2023 bank lending survey that credit standards for loans had “tightened further substantially” to the highest level since the 2011 financial crisis. At the same time, the ECB said demand for loans fell by 38% and rejected loan applications made up nearly 18% of the total, the highest level since 2015.

“European companies are just not doing big investments,” says Jeroen Van Doorsselaere, vice president of global product and platform management at Wolters Kluwer FRR, a business advisory firm. “Bank rates are so high; many firms worry they won’t be able to pay a loan back. Funding is not available unless your firm has absolutely the very best credit ratings.” Most vulnerable to default are companies in Italy and Spain, which have the highest share of short-term and variable interest rate debt, according to the Banque de France.

The slowdown has been sudden and severe. “Growth in total net bank lending to eurozone households and businesses slowed in the first quarter of 2023 to the weakest it’s been since the third quarter of 2021, Martin Beck, chief economic adviser to EY’s quarterly European Bank Lending Economic Forecast, said in an email, “meaning that when adjusted for inflation, lending growth was in negative territory.”

For the minority of European firms that rely on bonds to raise capital, the high-yield bond market has suffered the same kind of shrinkage as its US counterpart, falling 15% since its peak, according to Bloomberg News. High-yield interest rates are over 7%, compared with 5% at the same point last year. According to Fitch, high yield issuance has plunged in Europe, down 58% from the previous year.

There are no overall numbers for bank loans in Asia, which covers a more balkanized group of markets. China is an outlier, having cut its policy interest rate from 2.75% to 2.65% in hopes of stimulating its struggling economy.

But the World Bank said in its June report on Global Economic Prospects that a run-up in debt by Asian governments and businesses could weigh on growth this year. “Elevated debt loads make debt distress more likely, particularly in the face of adverse shocks that lead to increased risk aversion and borrowing costs, and ultimately slower growth,” the report said. And because Asian businesses are heavily dependent on exports to the US and Europe, Thompson notes, the tighter lending conditions in those regions will likely impact Asian suppliers through reduced orders due to lack of available financing.

“When we get that sort of weakness in advanced economies, that spills over to emerging economies,” he warned. “We are forecasting a period of subpar growth as the most likely outcome, rather than anything really dramatic.”

The conflict over chips began as an effort to limit the use of advanced, Western-designed semiconductors by the Chinese military. Now, those national security concerns are overshadowed by efforts in the US, Europe and Asia to use subsidies to build industries that are national champions, creating jobs and challenging competitors.

So far, the competition has focused on semiconductors and electric vehicles (EVs), both cutting-edge technologies that have a multitude of sophisticated components and suppliers. Governments have earmarked tens of billions of dollars to support companies creating jobs at home to ensure that their domestic industries are not hurt by their traditional trading partners.

Dean Baker, a co-founder and senior economist with the Center for Economic and Policy Research (CEPR) in Washington, notes the US government has been subsidizing favored industries for decades, including nearly $48 billion budgeted this year for the National Institutes of Health to the benefit of pharma. But today’s global subsidization is different: not only promoting research but aiming at building factories from Arizona to Berlin that support domestic industries and often hobble their foreign competition.

A New Paradigm

“It’s a different paradigm than the old industrial policy,” says Sujai Shivakumar, a senior fellow and director of the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS) in Washington, DC. “In the past, it was about developing advanced methods that didn’t have much civilian application. What we are engaged in now is more about creating ecosystems of manufacturing networks, venture capital networks, workforce training networks and bridges across the networks as well, so they all work together.”

The first salvo in this skirmish was passage of the CHIPS and Science Act in 2022 (the CHIPS Act), which provides $52.7 billion in subsidies and tax credits for research and the construction of chip fabrication plants (fabs) in the US, after decades in which chip manufacturing had largely moved to lower-cost Asia. US Commerce Secretary Gina Raimondo commented in a speech at Georgetown University that the vision is to make the US “the only country in the world where every company capable of producing leading-edge chips will have a significant R&D and high-volume manufacturing presence.”

Tit for Tat

The US was not the only government keen to make sure it kept its advantage in producing semiconductors. The Council of the European Union unveiled its own Chips Act to mobilize €43 billion (about $45.5 billion) in public and private investments, including €3.3 billion for a “Chips for Europe” initiative. Japan, which once produced the lion’s share of the world’s chips, set aside ¥1.3 trillion (about $9.5 billion) to revive its chip industry. South Korea, which has been a leading chip producer, adopted new subsidies in 2022 in the form of big tax breaks for semiconductor companies totaling more than 3.6 trillion won (some $2.8 billion). All of these subsidies came as a riposte to the US moves to reshore its chip industries. “We’re in a chips war,” says Yang Hyang-ja, a member of the Republic of Korea National Assembly who formerly worked for chip producer Samsung.

While subsidies for chips have caused ripples of concern globally, the Biden administration’s decision to add a requirement in the 2022 Inflation Reduction Act (IRA) to restrict the tax credit for EV purchases to only those EVs with their final assembly in North American factories—an indirect form of government subsidy—prompted protests from Europe, where many internal combustion vehicles are currently produced and which  hopes to ramp up EV production. Biden then doubled down in his State of the Union speech on Feb. 7, saying his made-in-America campaign will now extend to “all construction materials used in federal infrastructure projects” under the $1.2 trillion Infrastructure Investment and Jobs Act signed in 2021.

Calling his strategy, a “blue-collar blueprint to rebuild America,” Biden invoked nationalist rhetoric to define his approach. “We should buy America to build America. We’ve been importing foreign goods and exporting American jobs,” he said.

Europe was listening with growing concern. In response to the American moves, Margrethe Vestager, executive vice president of the European Commission (EC), spoke in January to a forum of member states, proposing a “temporary crisis and transition framework” that would allow European governments to subsidize renewable energy technology and give companies tax breaks, something Vestager as commissioner for competition had previously opposed. In a letter to European Union (EU) member-state finance ministers outlining her proposal prior to the meeting, Vestager said the “competitiveness of European industry is facing a number of challenges,” adding that the IRA “risks luring some of our EU businesses into moving investments to the US.” She also suggested that the effect of the IRA on some European industries could be “toxic.” While European politicians complained vocally that the US was illegally subsidizing its industry, published data showed European countries had already provided €672 billion in state aid to private businesses, led by Germany (with more than half the total), France and then Italy.

Chip Snap

Chip production came into greater focus during the pandemic, when supply chain snafus caused a chip shortage for many industries, especially auto manufacturers. At the moment, between 75% and 80% of chips are manufactured by companies in Asia, led by Taiwan, which accounts for about 20% of chips, followed by China, South Korea and Japan. An incredible 92% of the most advanced chips is produced by Taiwanese fabs, especially the Taiwan Semiconductor Manufacturing Company (TSMC), for companies in the US.

Concern that China might invade Taiwan and cut off the supply of chips was one of the rationales for passage of the CHIPS Act, which requires companies receiving US government aid to agree not to build or expand facilities for production of semiconductors in China. The administration imposed the toughest export controls in decades on Chinese firms and banned US citizens from working for them. But it soon became clear that commercial considerations were also gaining greater importance.

This was made clear in a speech by Jake Sullivan, Biden’s national security adviser, in September. “We know there is nothing inevitable about maintaining our core strength and comparative advantage in the world,” Sullivan said. To preserve US technological leadership, he continued, the Biden administration is “formulating an approach to address outbound investments in sensitive technologies.” This could prevent American firms from making investments in Chinese startups in artificial intelligence, for example.

The CHIPS Act has had some initial success. According to the Semiconductor Industry Association, a trade group, the bill had prompted over 40 new semiconductor projects in the US as of December, with nearly $200 billion in private financing, to increase domestic manufacturing capacity.

Among those new plants is a facility in Arizona being built by Taiwan’s TSMC. Visiting the site in December, Apple CEO Tim Cook announced that his company, which has purchased most of its chips from Asia, would begin sourcing chips from the new plant when it opens in 2024.

Chris Miller, an associate professor of international history at Tufts University’s Fletcher School, in his new book Chip War, documents how governments have subsidized semiconductor production for decades for military purposes. But Miller tells Global Finance that unlike earlier government investments, the CHIPS Act appears more aimed at civilian than military uses of chips. 

“Unlike in the Cold War, where the government was trying to make missiles fly more accurately, the civilian use of chips has become so big and the economic impact is so large,” Miller says, that the loss of chip production in Taiwan “would create such a massive manufacturing depression in the US that it would have strategic ramifications similar to wartime.”

Miller says that while newly announced investments—including Intel’s decision to invest in two new fabs in central Ohio to produce advanced logic chips and Micron’s proposal to spend $100 billion developing a fab in upstate New York—will help diversify chip manufacturing to some extent, he believes that the most advanced designs will still be produced at fabs in Asia.

“It’s pretty clear that the new TSMC facility in Arizona will be one generation behind the cutting edge in Taiwan,” Miller says. “The reality is that Taiwan has so much capacity to make chips that it is going to remain a large share of global production despite the fact that the US, Europe and Japan are trying to build up some additional capacity in their countries.”

Investment bank Goldman Sachs notes in a research study, published in October, that it costs 44% more to build and run a new fab in the US than in Taiwan, including higher capital expenditures and steeper operational costs. “We believe the CHIPS Act should be viewed more in the context of US geopolitical strategy, ‘hedging’ against future crisis or major supply chain disruptions, rather than efforts to replace Asia’s current position and importance within the semiconductor supply chain,” the Goldman analysts conclude.

Miller notes that the Chinese government is pouring tens of billions of dollars into subsidies for the manufacture of lower tech chips that are used in cars and other consumer products. This practice could have the same harmful effects on the semiconductor industry as the low-cost Chinese exports of steel and solar panels had on those industries. Most semiconductor companies need profits from both high- and low-end chips to survive.

Douglas Fuller, a semiconductor expert at the Copenhagen Business School, says it is unlikely the chip industry would go back to 1990s levels of production in the US. “If the US, Europe and Japan do nothing, then their capacity will shrink even further,” Fuller says. “In the long term, there is going to be more and more demand, so the need for capacity is going to grow.”

Critics have long maintained that the highly profitable US semiconductor industry doesn’t need subsidies and would probably have built its new fabs in the US without the CHIPS Act. “While America’s share of global chip production has fallen from 37% in 1990 to 12% in 2019,” Scott Lincicome and Ilana Blumsack of the conservative CATO Institute argue, “real output and capital expenditures in the United States have increased substantially over the same period.”

Sustainability Subsidies

Because of climate change concerns, industries that produce components for renewable energy are likely to be the next battleground. Indirect tax subsidies for the production of EVs are already producing growing friction between the US and the EU, where car production accounts for more than 7% of GDP and employs more than 6% of workers, according to the IMF.

The US IRA contained a $7,500 tax credit for some electric cars, vans, pickups and SUVs. To be eligible for a Clean Vehicle Credit, a vehicle must have undergone final assembly in North America, defined as the US, Canada and Mexico. While many European companies already have some manufacturing plants in the US, Korean and Japanese firms tend to import parts for their EVs, meaning they don’t qualify for the tax credit, which on a $55,000 vehicle amounts to a 13.6% subsidy by the government. The law’s $369 billion in climate and clean energy assistance will also benefit solar panel and wind turbine manufacturers in the US.

On a visit to Washington in late November, French President Emmanuel Macron vented frustration with the CHIPS Act and the IRA. Macron said the two bills were “choices that will fragment the West.” EC President Ursula von der Leyen wrote to the 27 leaders of the EU’s member countries in December, saying, “Elements of the IRA risk unleveling the playing field and discriminating against European companies.”

European businesses are also concerned that the subsidies will force them to relocate manufacturing to the US or face withering price competition. “It is clearly driving the investments now in a very rapid pace,” said Peter Carlsson, CEO of Northvolt, a Swedish firm that supplies EV batteries to Volkswagen and BMW in Germany, in a February interview on Bloomberg television. He added, “Unfortunately, there is a risk that these investments are a little bit taking the momentum out of Europe.” Carlsson estimated his firm could get $8 billion in subsidies by the end of the decade if it built a factory now in North America.

While the EU is working on its own green tech plans, members are mostly focused on providing financial assistance for research and not the extensive support the IRA provides to US-based manufacturers. Complicating matters for the Europeans, opposition is emerging among EU members to suddenly increase subsidies. A statement by Denmark, Finland, Ireland, the Netherlands, Poland, Sweden, Hungary, Latvia, the Czech Republic, Slovakia and Belgium warns the EC “to exercise great caution. Fundamental changes to the EU state-aid rules should not be done overnight in the context of a temporary crisis framework.”

The CEPR’s Baker says that, because of climate change, he would prefer the American government to subsidize all purchases of nonpolluting EVs, not just those assembled in the US. “It’s not the best possible outcome; but I am happier that they have subsidies for cars made in the US than none at all, because we need to get people to buy electric cars rather than gas-powered cars.”

Software firm Salesforce expects to take a $600 million hit to revenues this year. Rival firm Microsoft expects the blow to be about $450 million. It’s not the war in Ukraine or high oil prices that’s causing the pain. The prolonged rise of the US dollar is having a dramatic impact on revenues of multinationals with strong overseas sales.

Even firms that don’t use the dollar are hurting indirectly.

“While we had a great quarter, the US dollar had a far better quarter than we did,” Salesforce CEO Marc Benioff told business TV channel CNBC. “I’ve never seen the strength of the dollar like this.”

The US Dollar Index, which tracks the greenback against a basket of major currencies, reached 108.5 in July, up 12.8% since the beginning of the year, the largest rise in two decades. The rise of the dollar sent other currencies, such as the British pound, the euro and Japanese yen, tumbling.

The strong dollar will have chopped $40 billion off the earnings of North American companies in the first half of the year, according to a projection by Wolfgang Koester, chief evangelist at currency firm Kyriba. 

While having a cheaper currency compared to the dollar should theoretically help companies in Europe and Asia price their products more competitively and earn higher profits, the fact that many commodity inputs in manufacturing are priced in dollars—consider iron, copper and oil—means the benefits to the weaker currency are small, and many are also taking a hit.

“Imports are getting more expensive in Europe and companies are suffering more,” says William De Vijlder, the Paris-based group chief economist of European bank BNP Paribas. “Increased export competiveness is a relatively small benefit compared to the higher import costs.”

While the war in Ukraine has encouraged some investors to move their money into US government debt as a safe haven, the primary driving force behind the dollar’s steep ascent is the differential in interest rates following the Federal Reserve’s efforts to contain the worst US price inflation in 41 years. The Fed on June 15 raised the benchmark fed funds rate by 75 basis points, the biggest increase since 1994, to a range of 1.5-1.75%—and promised more to come.

While the European Central Bank said it also would raise interest rates, by 50 basis points in July, its borrowing rate will still be negative, at -0.25%—a huge difference with the US rate. The euro has declined 11.5% from $1.13 since the beginning of the year, reaching dollar parity on July 13—the first time in more than two decades—after US inflation data spooked markets and led analysts to believe the Fed would be even more aggressive with rate hikes. 

Wells Fargo strategist Erik Nelson says in a note to clients that in addition to the monetary policy divergence, soft spots are emerging in the European economy so that EU companies are growing at a slower pace than US firms. “US underlying economic growth is materially stronger than that of the eurozone,” Nelson says.

Another explanation is that nervous investors are piling into dollars because dollar-based assets still have better returns despite swooning stock and bond markets. “The dollar has assumed the role of global stagflation hedge, with dollar cash being one of the few financial assets offering returns,” Deutsche Bank global currency strategist George Saravelos writes in a note to clients. “European investors are telling us they are selling down their overweight US bond and equity positions. But instead of repatriating the cash, they are hoarding it in dollars.”

While the rise of the dollar has not been as dramatic as it was in previous episodes of higher rates, it has been very long lasting, having begun the current strengthening phase in 2014. “In terms of persistence it may be historic, because some of the earlier ones were reversed,” says Joseph Gagnon, an economist at the Peterson Institute for International Economics. “The spikes in 1985 and 2000 were each reversed a couple of years later.  This rise of the dollar hasn’t been reversed.”

Many major British and European corporate entities, such as pharma giant GSK (formerly GlaxoSmithKline) and German software company SAP, already report their earnings in “constant” currencies, meaning they have taken out previous hedges so the change in dollar value has little short-term effect. “We have a kind of rolling hedging policy where we try to dampen the effects of the volatility in the US dollar-euro exchange rate by forward selling the future revenue,” said Airbus CFO Dominik Asam on a May 4 conference call with analysts. “If [euro] rates sustain at such a strong dollar rate, we would be able to hedge in more attractive rates and that is potentially a good offset to some of the downsides we are facing on the inflation side.”

Stuart Gregory, finance director of C. Brandauer, a precision metal stamping firm in Birmingham, England, says the strong dollar and weaker pound have been a boon for his firm’s business, which is about 50% exported outside the UK. “A lot of our materials are bought from Europe,” he explains, “so we’re not doing too badly, because the euro is quite healthy against the pound.”

Beyond short-term support to the bottom line, the differential shows potential to reshape some trade. “We do have US customers, and the strong dollar is obviously encouraging them to buy a bit more from us,” Gregory adds. “Not only buy a bit more, but also look at transferring some of their business away from the US.”

As the Feds move to raise rates touched off a global scramble by other central banks, even Switzerland felt compelled to join in, raising interest rates on June 16 by half a percent, also to -0.25, as inflation took hold in the country. The Swiss franc is down by 5.5% against the dollar this year, even after the rate hike by the Swiss National Bank, the first since 2007.

Jeffrey Frankel, a Harvard professor who specializes in capital formation and growth, noted in a recent column that a world accustomed to currency-depreciation wars is now instead seeing a currency-appreciation war, as each central bank tries to stay ahead of inflationary pressures on domestic prices by raising interest rates.

“With high global inflation likely to persist for some time, the prospect of reverse currency wars is looming larger,” Frankel comments. “Instead of a race to the bottom in the foreign exchange market, we may see a scramble to the top—and poorer countries are likely to suffer the most.”

It’s not just the dollar that C-suite executives are worried about, either. Oil prices, bottlenecks in supply chains and labor shortages all add to their woes. According to a global survey of corporate executives by the Conference Board, 15% of respondents say they think a recession is already underway and another 61% expect a recession in their primary region of operations before the end of 2023.

For corporate CFOs, the central bank actions created headaches beyond currency wars: The average interest rate on newly issued investment grade corporate bonds has risen from 2.49% at the end of 2021 to 4.42% in June 2022, while average rates for high-yield debt shot up from 5.64% to 7.53%, according to Leveraged Commentary & Data, part of data firm PitchBook.

Austrian utility EVN, for example, is marketing its second bond of the year at 105 to 120 basis points over swap rates, up from the 70 basis points it had to pay just two months ago. For European junk bond issuers, who saw a record low interest rate of 1.88% in August 2021, they must pay between 5.57% and 9.18%, according to Bloomberg data.

Higher corporate borrowing rates are likely to slow capital expenditures for such things as new factories and equipment, and the higher rates may force some overleveraged companies into insolvency. Cosmetics icon Revlon, for example, which has $3.7 billion in outstanding debts, filed for Chapter 11 bankruptcy on June 15.

Among industrialized countries, the most dramatic effect of the strong dollar is being felt in Japan. The yen tumbled below 139 to the dollar July 14, its lowest level in 24 years, after the central bank said it would not raise rates because inflation is much lower in Japan than in other nations. “It is not appropriate to tighten monetary policy at this point,” says central bank governor Haruhiko Kuroda. “If we raise interest rates, the economy will move in a negative direction.”

Japan’s main share index, the TOPIX, is heavily weighted toward manufacturing, thus “on balance, they are benefiting from [the weaker yen],” says Nicholas Smith, a strategist at broker CLSA in Tokyo. “Japan is brutally competitive at the moment.”

At Japanese pharmaceutical giant Takeda, for example, CFO Constantine Saroukos told analysts May 11 that the company’s revenue estimates were based on the yen being at 119 to the dollar. “If foreign exchange rates remain as they were at the end of April for the duration of fiscal year 2022, that would represent a high single-digit upside to our forecast for both revenue and core earnings per share,” Saroukos said. At the end of April, the yen reached 130 to the dollar.

CLSA’s Smith believes it was the slowing of the global economy rather than yen weakness that inspired concern about the outlook for Japanese corporates. Toyota, the world’s largest carmaker, said it expected net profit to fall from $22 billion in 2021 to $17.3 billion in the current year, despite the more favorable exchange rate and growing demand for small cars because of high gasoline prices. The company has long manufactured cars in the United States, where costs are based in dollars, largely because of a 25% tariff on imported SUVs.

However, despite the lower yen, Japan ran a $17.8 billion trade deficit in May because of the high cost of imported oil. The country has been forced to generate electricity with oil since the temporary closure of nuclear power stations following the Fukushima nuclear accident in March 2011.

 Other Asian countries are also benefitting from increased revenues in local currencies thanks to the strong dollar. “Manufactured exports have held up very well,” says Bob Fox, chair of the Digital Economy and ICT Group at the Joint Foreign Chambers of Commerce in Thailand. “The weak Thai baht against the dollar is one of the main reasons.” Fox says that companies that use local labor and don’t require imported commodities are doing extremely well even in the face of headwinds such as a tripling in shipping costs in dollars. These, he says, are usually passed on to the customer.

China, which carefully controls the exchange rate of the renminbi to the dollar, has allowed its currency to depreciate from 6.3 at the start of the year to 6.74, a decline of about 6.5%. The Chinese economy has been beset by Covid-19 lockdowns and the slowing global economy. Nonetheless, Chinese companies managed to export $52 billion to the US in May, compared with only $39 billion in February.

While investment dollars have flowed out of China this year, the Institute of International Finance reported that, in May, China recorded $2 billion of net inflows compared with $3.5 billion of outflows in other emerging market countries. 

A grim example is Sri Lanka, where the high, dollar-based cost of oil has plunged the country into the worst economic crisis in its history, with lengthy daily power cuts and a shortage of foreign exchange. The country is on the verge of defaulting on its foreign debts, many of which are priced in dollars.

“Today, the most likely victims of a strengthening dollar are not other major rich countries, but rather emerging and developing economies,” says Harvard’s Frankel. “Many of them have substantial dollar-denominated debts, exacerbated by the fiscal spending required to fight the Covid-19 pandemic. When the dollar appreciates, their debt-servicing costs increase in local-currency terms. The combination of rising global interest rates and a stronger dollar can trigger debt crises, as it did in Mexico in 1982 and 1994.”

Despite concerns that economic growth may slow as central banks tap the brakes to combat inflation, companies around the globe are in a spending boom for capital such as factories and for things like digitalization and automation, 5G networks and the transition to clean energy.

While the US was clearly the leader in capital expenditures (capex) through the end of 2021, Asian economies (excluding Japan)—which account for 46% of global capex, according to S&P Global—have recently ramped up their investment plans as well.

The shortage of computer chips, which has hampered production of everything from autos to video game consoles, makes semiconductors the poster child for capex. Companies are racing to build new fabrication plants (fabs) globally to meet demand. The heaviest hitter is Taiwan Semiconductor Manufacturing, which says it plans to spend a staggering $40 billion to $44 billion in 2022 on new production facilities. Not to be outdone, US chipmaker Intel says it will spend $20 billion on two fabs in Arizona and Samsung is spending an addition $18 billion on chip factories.

Even China’s Semiconductor Manufacturing International, which is under trade restrictions in the US, increased its capex spending plans to $5 billion this year.

The current boom began in the second half of 2021 in the US, whose economy was the first to emerge from the doldrums of the Covid-19 pandemic as consumers shopped relentlessly online and bought new goods, from home gyms to computers to streaming services. The US has recorded the strongest capex spending since the 1940s, according to Morgan Stanley, driven by investment in business equipment and intellectual property rights.

Trends Accelerate

Widespread lockdowns accelerated a trend already underway before the pandemic: companies moving online and investing heavily in cloud computing and automation. To counter some of the impact of the Great Resignation—a record 4.5 million American workers quit their jobs in November alone—firms ramped up spending on artificial intelligence to replace human employees.

Bank of America Head of US equity and quantitative strategy, Savita Subramanian, analyzing earnings reports of 200 S&P 500 index companies late last year, found capex had increased 23% compared with the prior year. Perhaps more importantly, on a two-year basis, capex was up 15%. She suggests capex may be entering a growth cycle.

Even after stores reopened, consumers have continued to shop at home, encouraging companies to continue investing heavily in e-commerce. The 2,000-pound gorilla in online commerce, of course, is Amazon, which not only sells and ships products but provides cloud services to other retailers through its AWS unit. Amazon spent a hefty $73.7 billion on capex in 2021, roughly broken down to 40% in infrastructure, 30% in warehouses, 25% in transportation, with the rest related to offices and the like, Amazon CFO Brian Olsavsky explained on the fourth-quarter earnings call.

Going forward, capital spending on fulfillment will fall back somewhat to “match growth of our underlying businesses,” he said. Elsewhere, however, the spending will continue. “We see the capex for infrastructure going up” this year as the company supports AWS, he noted. For transportation, “we still see additional levels of investment in that in 2022.”

Similarly, Alphabet, the parent company of Google, spent $24.6 billion in 2021 on purchases of property and equipment, which it expects to increase in 2022. On the company’s 2021 fourth-quarter earnings call, after reporting a 47% increase in Google cloud revenue, CFO Ruth Porat said, “We plan to continue to invest aggressively in cloud given the sizable market opportunity we see.” She added that the company plans increases in property acquisitions, including $1 billion for its London headquarters and $2.1 billion for an office building in New York.

As Amazon’s Olsavsky indicated, many US companies are expecting the pace to moderate. “The post-pandemic boom driven by the reopening and booming consumer demand is behind us, but we still have a pretty positive outlook for business investment this year,” says Lydia Boussour, lead US economist at consultancy Oxford Economics. “There is a strong pipeline of industrial orders and we know manufacturers are still struggling to meet that robust demand.”

Boussour notes that automation has been moving from traditional industries like automotive, which has used robots for decades, to things like health care, which has invested heavily in technology during the pandemic.

Strong US consumer demand is driving export growth in Asia, according to Chetan Ahya, chief Asian economist at Morgan Stanley. “Exports are the main driver of capex in Asia and I think growth in exports will be sustained,” Ahya says. “Both global exports and global trade have picked up; and at the same time, Asia has increased market share—so that part is a bit more sustainable.”

Ahya notes that 42% of Asia’s exports are capital goods like machinery, and he’s seeing no decline in demand. In addition, about a quarter of global exports are for the consumer sector. Even if demand for consumer goods weakens, he says, US companies are feverishly restocking inventories depleted during the pandemic, which will keep the exports and capex flowing.

One of the rebounding sectors is car manufacturing, which is ramping up to meet unfulfilled demand in the US. Dwarfing the amount spent by other Japanese automakers, Toyota announced that it would spend 4 trillion yen (about $33 billion) on capex for electric vehicles between 2022 and 2030. The amount includes more than $450 million to improve Toyota’s factory in Kentucky. In addition, Toyota CTO Masahiko Maeda says this investment will include a half-trillion yen toward development of batteries for electric and hybrid vehicles, on top of the 1.5 trillion yen he had previously announced in September, to meet the company’s 2030 goals.

Modernization and Green Tech

Apart from exports, economists expect domestic Asian capex investment to begin rising in 2022. The big drivers in Asia are mobile telecoms’ 5G investment and spending on the transition to a clean economy by utilizing more renewable energy. For example, according to Fitch Ratings, the CK Hutchison telecom group, a mobile provider in Hong Kong as well as Britain and Italy, expects to spend 27%-33% of revenue, accelerating 5G rollout plans in its coverage areas. The company had $12 billion in revenue in 2021.

In January, CK Hutchinson earned final approval for its $6 billion merger with Qatar-based Ooredoo of the two companies’ telecom assets in Indonesia. The combined firm, IOH, will put some of the estimated $300 million to $400 million in annual savings into capital improvements such as rolling out 5G across the country. “The merger will create a company with the strength and scale to accelerate Indonesia’s digital transformation and improve network performance and customer experience across the country,” says Aziz Aluthman Fakhroo, the managing director of Ooredoo Group.

Under its current five-year plan, China is making massive investments in switching from coal and oil for energy to things like solar- and hydropower. China gets 80% of its energy from fossil fuels but hopes to cut that to 14% by 2060. According to the publication China Briefing, the country issued $573 billion in so-called special-purpose bonds in 2021 to fund local government investment, much of it for transportation infrastructure. It issued another $230 billion to stimulate growth in the first quarter of 2022.

Chinese President Xi Jinping told a UN conference in October that the country is building a 100-gigawatt wind- and solar-energy project in the desert, but didn’t disclose a price tag. “China will continue to promote the adjustment of industrial structure and energy structure, vigorously develop renewable energy and accelerate the planning and construction of large-scale wind and solar projects in desert areas,” Xi said.

In Europe, corporate capital investment declined sharply during the pandemic but has now returned to levels similar to the years before, according to the European Investment Bank (EIB). “The share of firms expecting to increase their investment in the current financial year has bounced back from the dismal levels of 2020,” says the EIB Investment Report 2021/2022. “The caveat is that investment is expected to rise from a very low base, as many firms cut investment in 2020,” says the bank. “Wide differences exist among countries, however; and investment is often influenced by the near-term outlook along with pandemic indicators such as vaccination rates.”

One of the biggest investment surges in Europe comes from the all-important auto industry, which is spending heavily on retooling factories to produce electric vehicles. Volkswagen, the world’s largest carmaker by revenue, says it doubled production of electric vehicles in 2021, and will put $59 billion between now and 2026 into development of electric vehicles and e-mobility efforts.

“Be assured we will make no compromise when it comes to the necessary investment in future technologies,” said VW CFO Arno Antlitz on the company’s fourth-quarter earnings call last March. “For that reason, we have guided for R&D around 7%. This is a reflection of our execution of our BEV [battery-powered electric vehicle] strategy and of building up our software competence. In relation to capex, we will continue our strict, disciplined approach and are guiding around 6% [of sales].”

Gareth Williams, a London-based analyst who tracks global capex volumes as head of Corporate Credit Research for S&P Global, says Europe’s capex spending is lagging that of the US but is broadly similar in terms of industries that are spending the most.

“Because of the tensions between the US and China, global supply chains have proved more vulnerable than people assumed,” Williams says. “That’s making companies reconsider and invest in their supply chains closer to home—and that certainly applies to Europe as well as the US.”

Mitigating Political Risk

The conflict in Russia and the Ukraine is only the latest example of geopolitical risk in action. Europe’s big utilities were already investing heavily in technology to reduce dependence on Russian energy. German utility EnBW, for example, is planning to spend €1.5 billion ($1.7 billion) on expansion of gas-fired power plants.

ENEL, Europe’s largest utility by market capitalization €71.6 billion ($81 billion), says it is targeting an expenditure of €12.5 billion on capital investment this year, an increase of about €500 million over 2021. “Investments are up double digits in line with expectations, demonstrating once again our deployment capabilities that will fuel future growth,” ENEL CFO Alberto de Paoli told analysts on the company’s third-quarter 2021 earnings call. He said ENEL had spent €3.9 billion in Europe, where it has power generation in Italy and Spain; €2.3 billion in Latin America; and €1.3 billion to improve North American generation. He said he expected to close the year with more than 5,000 megawatts of new renewable energy production.

Like the US, Europe has faced supply chain disruption, and not from Asian suppliers only. Another factor affecting Europe is Britain’s departure from the European Union under Brexit. Consequently, spare parts and other manufactured goods now face customs delays entering and leaving the UK, prompting a large number of companies to invest in moving their supply chain away from Britain or to increase spending on logistical facilities such as truck depots in Europe, says Williams. “Supply chains are being redirected partly to reflect new customs checks in place that weren’t there before.”

The major question facing CFOs right now is whether a potential slowdown in GDP growth could alter their spending plans in 2022, since at most companies capex is closely tied to revenue growth.

The IMF’s January 2022 outlook projects global GDP to slow from 5.9% in 2021 to around 4.4% in 2022 and 3.8% in 2023. Worse, “inflation is expected to remain elevated in the near term, averaging 3.9% in advanced economies and 5.9% in emerging market and developing economies in 2022.” If the world’s central bankers start raising interest rates, as many expect, this latest wave of capex spending may crash on the beach.

What does Coca-Cola have in common with FCA Poland, a car manufacturer in the southern Polish city of Bielsko-Biala? They are just two of the companies that depend on international trade for a sizable percentage of their revenue and are now being sideswiped by the steady rise in the US dollar.

John Murphy, Coke’s chief financial officer, told analysts on the company’s third-quarter earnings call in late October that he expected a “two- to three-point currency headwind to revenue and a two- to three-point headwind to earnings for the full-year 2022.”

Other US multinationals, such as tractor maker John Deere, also reported taking a hit because of currency. The US dollar index, which measures the US currency against a basket of six other currencies, has increased 4.57% since January.

 In fact, the US Census Bureau, which tracks imports and exports of goods, said the trade deficit widened to $98 billion in September. That compares with a deficit of $67 billion in January 2020, before the Covid-19 pandemic began. While exports remained static, the strong dollar made imports more attractive, growing from $203 billion in January 2020 to $240 billion in September, although some of the increase could be attributed to the rebound in the economy as consumers opened their wallets and returned to shopping malls.

Calculating the dollar’s impact on developing countries is a bit more complicated than trade figures or simple currency conversions would suggest. According to Jane Foley, head of foreign currency strategy in London for Dutch bank Rabobank, the threat of inflation is far greater in developing countries than in the major industrial nations of the G10. That’s largely because energy prices soared recently, with benchmark Brent crude oil, which traded at $49 a barrel in December 2020, now close to $84.

“When you look at emerging markets, there are a lot of headwinds,” Foley says. “There are higher energy prices, fear over the Federal Reserve hiking interest rates and a lot of dollar- and euro-denominated debt.”

At its most recent meeting on Nov. 3, the Federal Reserve’s Federal Open Market Committee announced that the central bank would begin reducing its purchase of US government debt by $15 billion a month. Traders in the fixed-income market expected the Fed to beginning raising interest rates from near zero levels next June.

The fear is that the Fed taper in purchasing bonds will be a rerun of the “taper tantrum” in 2013, when the Fed began selling debt it bought during the 2008 financial crisis, causing emerging market assets to tumble as investors headed for the higher interest rates in the US and other developed countries. The J.P. Morgan index of emerging market debt in local currencies is already down 6.1% this year.

One area where dollar-denominated energy prices have had a major impact is Eastern Europe. In Poland, which is in the European Union but maintains its own currency, inflation reached an annual rate of 6.8% in October.

In response, the National Bank of Poland raised interest rates for the second time in two months, to 1.25%, saying it was reacting to higher commodity prices—which are priced in dollars—and shortages due to supply-chain issues (see cover story on supply chains). Despite the increase in interest rates, the Polish zloty has fallen 6% this year against the dollar, meaning that energy and other commodities became more expensive for companies that export products.

Tomas Dvorak, an economist who studies Eastern Europe for the consultancy Oxford Economics, says the inflation problem was a major concern across the region, including for Hungary and the Czech Republic. Prague joined Warsaw in hiking interest rates in October to keep a lid on inflation. The question for companies in these countries is how they can survive high inflation with the cost of borrowing money rising.

“It depends on whether the central banks will stick to their guns and keep hiking the rate, or if they will be forced by circumstance to slow down or reverse course,” Dvorak says. For the moment, the higher interest rate has benefited manufacturing firms by supporting the Polish zloty and Czech koruna, because they must import intermediate goods priced in dollars before finishing them and exporting them to other countries.

“A stronger currency is good for manufacturing firms,” Dvorak says.

Another country being hit by the strong dollar is Turkey, which must rely on imported oil and other commodities to keep its industry functioning. But unlike the Eastern European countries, the Turkish central bank—under apparent pressure from President Recep Tayyip Erdogan to make economic growth a priority—cut interest rates from 18% to 16% in October, sending the Turkish lira crashing to 9.45 to the dollar, its lowest level ever.

Fadi Hakura, a consulting fellow and Turkey expert at Chatham House, a British think tank, says the government was trying to spur a consumption boom to boost the growth rate. As a result, the country’s foreign-denominated debt ballooned to a record $328 billion. “Foreign investment has been on a clear downward path for the past five years,” Hakura says. With up to 80% of industry depending on inputs from abroad for their factories, the declining lira has made production more expensive and undermined the advantage the cheaper currency would normally provide to boost exports.

Turkey wasn’t the only one getting hit by the strong dollar. The South Korean won recorded an 18-month low that prompted the central bank governor to warn that he is considering taking the rare step of intervening in the foreign exchange market to support the won. The central bank raised its policy rate in August, but the won kept depreciating against the dollar. Other emerging markets, such as Iran and South Africa, were also negatively impacted by the strengthening US currency.

Countries that export oil, however, earn dollar income. Russia, Saudi Arabia and others have thus benefited from dollar appreciation.

A study in December 2020 by the Bank for International Settlements, the world’s central bank, looked at the effect of dollar strength on emerging market economic growth. “Our results suggest that broad dollar appreciation dampens real GDP growth on average,” the study said. It added that the dollar affects emerging markets more strongly than small, advanced economies, especially countries with high dollar debt and a large foreign investor presence.

With the Fed taper program just beginning, analysts are forecasting more asset flows out of developing economies and into assets that promise higher returns, such as dollar bonds. That could make the situation far more difficult for companies facing the triple threat of higher energy costs, inflation and increased wage demands.

Iconic motorcycle firm Harley-Davidson saw its return to profit threatened in the second half of 2021 by a substantial runup in its raw material costs, especially for steel and aluminum, which cut margins by five points. “I think dealers and customers understand that we needed to pass on some of the price increases and the price pressures we are seeing in the market,” CEO Jochen Zeitz told analysts July 21, explaining that the firm added a 2% surcharge.

Harley’s experience became an increasingly common complaint for CFOs: Steadily rising material and labor costs are creating an inflationary spiral for many companies for the first time in two decades. For many current executives, such an economic environment is an entirely new experience.

The US inflation rate reached 5.4% in July from the previous year, the biggest jump in prices in 13 years. In Europe, inflation reached 3% in August, the highest level in a decade. Developing Asia was also affected by the price surge. The producer price index in China, which is the workshop to the rest of the world, surged 9.5% in August, according to the National Bureau of Statistics, prompting Beijing to release oil from its national reserves for the first time ever to “alleviate raw material price pressures.”

 While the trend of rising prices became obvious to many private sector executives, central bankers and many economists continue to insist that inflation is likely to be “transitory,” and that the higher prices may abate early next year. Fed Chairman Jerome Powell, for example, said in late August that recent inflation numbers are “cause for concern,” but warned that tightening monetary policy in response would be a “damaging mistake.”

But the Fed’s own Beige Book, the central bank’s commentary on the economic outlook, told a more downbeat inflation story. “With pervasive resource shortages, input price pressures continued to be widespread,” according to the Beige Book released September 8. “Most districts noted substantial escalation in the cost of metals and metal-based products, freight and transportation services, and construction materials, with the notable exception of lumber whose cost has retreated from exceptionally high levels. Even at greatly increased prices, many businesses reported having trouble sourcing key inputs. Some Districts reported that businesses are finding it easier to pass along more cost increases through higher prices.”

Illustrating the painful price trend was the release of the US producer price index on September 10. On a year-over-year basis, the PPI was up 8.3%, the biggest annual increase since records began in 2010. The PPI measures the final demand prices producers get for goods and services.

Most business executives have a close-up view of the economy and had seen evidence of the ramp up in prices long before they were reflected in government statistics. Many believe they are seeing a long-term trend rather than a short-term blip.

“Policy makers have a strong incentive to say this is transitory because if it is not transitory then higher prices become a self-fulling prophecy,” says Campbell Harvey, the J. Paul Sticht Professor of International Business at Duke University’s Fuqua School of Business, who believes inflation may be around for at least two more years. “Inflation is bad for companies because unless you have market power, you cannot pass on 100% of the cost increases.”

Big manufacturers such as General Motors and General Electric are warning investors that higher prices are cutting into their profit margins. “I see the inflationary pressure very clearly,” said Carlos Tavares, CEO of Stellantis, which was formed by the merger of Fiat Chrysler and France’s PSA Group, speaking on an auto journalists’ webinar in July. “I see inflation coming from many different areas,” he added. 

Consumer goods companies are also feeling the heat. “Inflation is impacting us across the full spectrum of input costs, in materials, in packaging and, quite notably, in freight and distribution costs,” Graeme Pitkethly, CFO of British-Dutch giant Unilever, said on the company’s second quarter results conference call. He noted that the price of soybean oil, an ingredient in the company’s dressings, had risen 80% compared with the previous year, while palm oil, which is used to make skin treatments, had increased 70%. “Our best percentage estimate of our input cost inflation for H2 increased to the high teens,” Pitkethly said.

Simon Geale, executive Vice President of Proxima, a British-based procurement firm, says that in addition rising raw material costs, freight prices are soaring for companies that need to import commodities, in some cases reaching 10 times the cost that prevailed 15 months ago.

“It’s a very tough market for businesses, especially those that haven’t been stockpiling a long way in advance,” he says.

Geale says his firm is advising CFO clients to factor higher prices into their strategic planning and to wring savings out of their supply chains by streamlining product specifications and reducing waste. He also recommends what he calls a “new-market focus”–seeking out new sources of supply with whom it is possible to have greater negotiating power than existing vendors. “You have to change the way that you think about buying and the way you think about the market,” he says.

Hardik Sheth, head of the CFO Excellence practice at consultants BCG, notes that the last significant inflation occurred when Ronald Reagan was president in the 1980s. Many CFOs–now in their 40’s–have no experience of how to handle rapidly rising costs.

Sheth points out three ways to cope with rising prices, beginning with the traditional approach of cutting internal costs. Secondly, firms can match higher input costs by raising their prices. A third option is to invest in sales channels to expand the business footprint. “Just simply raising prices might not get you [where you need to go],” he says.

And not all companies face the same elasticity of demand. “Some companies that took quite a hit in the pandemic are not looking for an immediate price increase,” he explains. “They want to attract customers back first.”

Sheth says companies should hedge their input costs, much as Southwest Airlines did in the 1970s by buying oil price contracts. “If you are a manufacturing company and you need to procure certain raw materials to produce your finished product, you lock in the price of that raw material with your supplier,” he says. But he conceded that with supply chains in disarray in the aftermath of the pandemic, stockpiling inventory of raw materials and even finished components like digital chips is going to be difficult in the coming months. Companies are resorting to multiple duplicate orders with different suppliers to obtain the necessary inputs, but even those efforts have proved less than satisfactory–Ford Motors had to cut production on its best-selling pickup trucks in late August because of the shortages.

Most firms have a primary supplier, and they should be approached to use the past relationship to begin a discussion about lowering prices, suggesting that it may be necessary to use other suppliers to meet your cost goals if the primary supplier is unyielding on price. Another tactic businesses are using is to take a financial stake directly in suppliers to ensure that they are first in line when supplies do exist.

Another concern for companies is the impact inflation may have on labor demands. The recent runup in the US consumer price index is likely to prompt workers to seek higher wages according to Duke University’s Campbell. “If the CPI is running 5.4% and you give an employee a 2% raise, are they going to buy that?” Campbell asks. “They’re going to say, ‘you cut my wage,’ and I need to look elsewhere—and it’s really easy for me to jump to another job right now.”

He says that with wages increasing, at some point it may become attractive for some companies to move manufacturing to cheaper labor countries, but the shortage of spare parts and hefty shipping costs to the US and Europe may make that alternative less appealing.

Another solution is to increase use of technology like machine learning and artificial intelligence to reduce dependence on workers. The pandemic speeded up adoption of digitization of many job functions because workers couldn’t easily get to the office, but that trend is likely to be sticky even when the pandemic ends. For example, the use of contactless digital payments in the US and Europe–which had never taken off–soared because consumers didn’t want to touch terminals for fear of catching Covid-19, while businesses had no one in the office to open mail containing checks from customers. Companies are using video technology mounted on the heads of warehouse employees to conduct inventory counts instead of sending auditors to make the legally mandated inventory controls. 

In 2019, corporate borrowing in the United States reached $10 trillion, prompting alarms from the Federal Reserve and the International Monetary Fund. Despite those warnings, borrowing surged during the pandemic last year and has climbed even higher this year. But now concern over the level of corporate borrowing is mostly muted. What’s changed the outlook?

Although US corporate debt issuance keeps growing—reaching another $958.4 billion in the first five months of the year—bankers and economists are being reassured by the rebound in business activity after the pandemic and the fact that many companies are sitting on larger cash reserves rather than spending the money.

“The total amount of debt looks pretty high compared to GDP, but a lot of the debt issuance that happened under Covid-19 was largely used to build up cash balances,” says Jesse Edgerton, a senior economist at J.P. Morgan. “If you look at levels of debt or leverage net of those cash holdings, they look a lot less elevated and are in the middle of their historical average.”

Another factor easing concerns is that there were fewer bankruptcies during the pandemic than expected, thanks primarily to government intervention: The Federal Reserve created $7 trillion to counteract the effects of the demand slump. As a result, many large companies have emerged stronger, with economic growth in the first quarter of 2021 hitting an annualized rate of 6.4%, the second highest growth rate since 2003.

Outside of the US, the picture is similar. In Europe, for example, corporate debt issuance boomed to $368 billion in the second quarter of 2020, a rise of 27% over the first quarter as companies shored up their balance sheets. In the first quarter of 2021, companies issued another $283 billion of bonds. The European Central Bank committed to buying $2.2 trillion in bonds through March 2022 as part of its efforts to support the economy during the pandemic.

“Rates are low, carrying costs of debt are low, and we’re coming out of the pandemic and economic indicators are quite strong,” says Gregg Lemos-Stein, head of analytics and research at S&P Global Ratings.

One reason frequently cited for so much continued borrowing is the low cost of money: The yields on Treasury one-year, two-year and five-year debt are still below 1%. So even companies with large cash hoards, such as Apple, which held $36 billion of cash on its balance sheet and $160 billion of marketable securities as of December 31, 2020, nonetheless issued bonds totaling $14 billion in February. Likewise, Amazon, which held $73 billion in cash and equivalents at the end of March, sold $18.5 billion in new debt in May.

One reason multinationals borrow when they are cash rich is that they are rolling over higher-cost existing debt at lower rates. For example, toymaker Mattel issued $1.2 billion of new debt, which CFO Anthony DiSilvestro said in a first-quarter earnings call would help “generate significant interest expense savings.” Thanks to a credit ratings upgrade after the pandemic, DiSilvestro said, the company will save $40 million a year by replacing bonds yielding 6.8% with new bonds priced between 3.4% and 3.7%.

Another common reason for borrowing is that some companies prefer to keep profits overseas rather than repatriate them to the US; and those funds, while showing as cash on the books, can’t be used for things like buying back shares.

Some companies are issuing new debt out of concern that inflation might drive interest rates higher soon; so they feel it is better to borrow now, when borrowing is cheap, even though they might not need the money immediately. Inflation in the US surged to 3.6% in April from a year earlier, a 13-year high, prompting the Fed to move the timetable for a rate hike up to 2023.

Mark Lynagh, co-head of Debt Markets EMEA at French bank BNP Paribas, says some companies are opting for longer-dated debt, rates that have gone up only slightly and remain low by historical standards. “We’re seeing quite a few borrowers actually buying back shorter-dated bonds and issuing longer-dated bonds, switching their debt profile,” Lynagh says. “The cost of refinancing debt is unbelievably low today.”

One of the key factors fueling the continued bond issuance is the huge liquidity in the bond market, with investors seeking higher yields. This was true for not only investment-grade rated debt, but also high yield bonds issued by companies with lower credit ratings because of existing high leverage or poor business outlook.

Carnival Cruise Lines, for example, issued $22 billion in new debt in the past year, finding willing investors even though its ships were idled in port for more than a year by the pandemic. The bonds issued early in 2020 carried an 11.5% interest rate; so investors made huge profits as the yield on the debt dropped to just 4%, sending the price of the bonds soaring.

While some companies were able to issue high-yield bonds below the 5% interest rate benchmark, they often had to accept shorter terms than investment-grade issuers, opting for five-year instead of the 15-and 30-year bonds being issued by higher rated companies.

Some of the high-yield debt being issued is for highly speculative investments. A company called MicroStrategy issued $500 million of debt June 14 to use for the purchase of bitcoins. The cryptocurrency peaked at $63,503 in mid-April but fell below $30,000 after China banned companies from mining digital currencies.

S&P’s Lemos-Stein says the default rate surged to 6% in the pandemic but never came close to the 10% default rate seen in the financial crisis of 2008-2009. “That is because of the massive amounts of (government) stimulus that flooded the market and enabled companies to take on liquidity or refinance and weather through 15 months.”

Another indication of the health of the bond market was the decision by Fitch Ratings to reduce its forecast for corporate defaults for 2021 to 1% from 2%. Fitch says the change resulted from “increased capital market confidence as constricted sectors in the economy reopen, which led to robust issuance and resulted in enhanced liquidity and pushed out maturities.” In 2020, Fitch said $104.4 billion in investment-grade debt was downgraded to junk status because of the pandemic; but that amount declined to just $2.6 billion this year.

While most analysts remain optimistic about the speed of the economic recovery and the safety of all this new debt, such high levels of indebtedness could cause problems if, for example, the economy should suddenly turn down or a new variant of Covid-19 causes new lockdowns.

J.P. Morgan’s Edgerton, for example, noted that while company cash holdings in aggregate were offsetting risks from indebtedness, some individual firms have taken on large debts and have not built up their cash balances. “We continue to think shocks to the economy could be amplified by current levels of corporate debt,” he says; but he added that the resilience of the corporate sector so far makes him less worried “that current corporate debt levels pose a significant risk to the expansion.”