With inflation rocketing businesses and financial institutions are looking at plans and mitigation. In Volume 6 of our The Inflation Shift article series, we look at the different challenges and resulting opportunities in two very different countries – Germany and Australia.
Germany: Countering Inflation with Resilience
A few weeks ago, the ECB implemented the highest interest rate hike in 11 years: the 0.5 percentage point hike was a historic move that brings years of loose monetary policy to an end. The reason for this move was record inflation – 8.6 percent in the euro zone in June and only one percentage point lower in Germany at 7.6 percent.
The inflation rate will remain a key challenge for countries and their citizens despite ECB measures. This is because the aftereffects of the pandemic are further exacerbating the impact of the war in Ukraine and the energy shortage. This applies not least to Germany, where the gas shortage is shaking the security of supply of key energy-intensive industries that are a cornerstone of our prosperity.
In this difficult initial situation, politicians and industry are called upon to work together to find solutions. It will be crucial not only to combat the symptoms of inflation in a targeted manner, but also to introduce measures for significantly greater resilience at all levels.Kai Bender, Market Leader Germany, Oliver Wyman
A new awareness must now emerge in the political arena and this needs to take the shape of an overarching risk management, so that risks can be responded to before they become dangers. This, combined with targeted fiscal stimulus to mitigate the effects of inflation and long-term investment in innovations (such as those fighting climate change) can bring together short- and long-term goals.
Businesses must now prepare for the economic downturn. Costs, capacities, and structures must be flexible however, in this current landscape of talent and skills shortages, layoffs would be the wrong measure. Instead of encouraging de-globalization, it’s important instead to discover new ways of cooperation and diversification as neither Germany nor Europe can operate self-sufficiently. Businesses also need to strengthen our appeal as an employer brand beyond national borders to remain attractive to the most sought-after talent.
An Australian Balancing Act
In comparison to its international peers, the Australian financial system and participants have arguably fewer scars from previous crises - they avoided both the depths of the Global Financial Crisis and the subsequent European sovereign debt crisis.
Furthermore, the recent global rise in energy prices, exacerbated by the war in Ukraine, is the latest and likely the biggest inflation driver in the short term, however we’ve also seen upward pressure domestically due to more localized conditions such as flooding in Northern NSW and QLD, coal outages impacting local energy prices, capacity constraints in certain industries like construction and a deteriorating trade relationship with China.
So how should Australian banks respond to the challenge of global inflation?
There are many possible scenarios however we believe that banks will initially benefit from the higher interest rates which come from a higher Net Interest Margin (NIM) but this comes with a warning - a material risk that more severe inflationary scenarios may cause volumes to reduce and cost of risk to increase. The banking system will face this evolving environment once they address legacy issues and move towards better capitalization, more resilient business models, solid governance practices and asimplification of business lines. However these actions don’t imply that the system would be fully prepared for this kind of disruption.
In Inflation: A Fragile Balance, Australian Partners Julian Granger-Bevan, David Howard-Jones, Ross Eaton and Engagement Manager Mark Wakeling examine the impact of high inflation on the Australian banking industry and what to do about it.
Only time will tell which of these scenarios is most likely to occur, and these scenarios should serve a reference point for bank executives as they simulate possible implications for the industry and prepare their response.
As many countries across the globe are facing inflation as we countdown to 2023, a culture and discipline of preparation and agility will best equip businesses to turn the challenges into opportunity. Check back in with the Inflation Shift to discover how the public and private ecosystem could aim for better production, better consumption, ESG mindsets, transformed organizations and more.
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