The Federal Reserve Bank raised interest rates by a quarter point today, reflecting a cautious response to signs that inflation in the U.S. is slowing. But despite the Fed’s less aggressive stance, many uncertainties remain for both the U.S. and global economy.

SAP’s Take

“Global economies and risks are interconnected more than ever,” says Prashanth Reddy, an economics expert at SAP. “The interaction among concurrent risks creates a more significant impact than the sum of individual risks. For example, the Russia-Ukraine war is causing global energy and food crises.”

As Reddy notes, the World Economic Forum introduced the term “polycrisis” in its , in order to capture the interconnected nature of global risks and their impact on world economies.

“In this connected fast-changing world, the response to COVID-19 forced many countries to respond with near-zero interest rates, quantitative easing, and government transfers to support their unemployed citizens,” says Reddy. “These policies and supply shocks created a rapid increase in inflation in 2022. “

In response, many developed countries rapidly increased interest rates to curb the inflation causing a global economic slowdown. According to the , global growth is expected to decelerate sharply to 1.7% in 2023. The world’s three major engines of growth — the U.S., the eurozone, and China — are all undergoing a period of pronounced weakness.

Reddy believes the U.S. economy will experience a moderate recession in 2023, amid slow wage growth despite a historically low unemployment rate. According to FactSet, U.S. economic growth is expected to be around 0.4% with consumer price index (CPI) inflation at 3.8%. After the latest move, the Fed is expected to hold rates at between 4.5% and 4.75% for nearly all of 2023 before systematically easing.

According to FactSet, China is expected to grow 4.7 % in 2023, and the eurozone to decline at -0.1%. Economic growth in emerging markets (EMs) is forecast to remain essentially unchanged at 3.4% in 2023, according to the . EM economies face the prospect of being further hurt by the higher commodity prices, monetary policy tightening, rising debt service costs, higher interest rates in developed nations and a strong dollar, according to Reddy.

This also translates to slower IT spending in 2023 at three percent in the U.S. and 2.1% in the EU, according to a Morgan Stanley CIO survey. Nevertheless, CIOs expect software spending to outpace growth in other industries at 3.3% in 2023.

Contact:
Ilaina Jonas, Senior Director of Global Public Relations, SAP
+1 (646) 923-2834, ilaina.jonas@sap.com

All eyes Thursday will be on the release October’s U.S. consumer price index (CPI) figure, a benchmark reflecting the rate of inflation. Some food prices, such as orange juice, have already reached record levels and are expected to go even higher as the impact of Hurricane Ida on Florida’s citrus industry is reflected in prices.

But inflation has impacted prices across the board — from juice to jeans — prompting consumer products companies to find new ways to please the consumer while growing profits.

SAP’s Take

For more than two years, consumer products companies have been grappling with supply chain disruptions, labor shortages, sustainability rules, war-related food ingredient shortages and now the newest factor: inflation-induced consumer buying patterns.

“These various forces are causing massive amounts of complexity in the business,” said Edward Kenney, 51·çÁ÷senior vice president of Consumer Products, Industry Business Units. “Their costs are increasing at a rate they can’t pass along.”

In some cases, producers are shrinking the size of their products while holding prices. In others, they are looking to change their formulas, Kenney said.

As consumer products companies are limited in their ability to pass along full cost increases, inflation is fueling their chief anxiety: how to grow profitability.

“It used to be very consistent and very easily predicted,” Kenney said. “They attracted new customers in new geographic areas. That kind of expansion has really hit the end of the road. Now, you have to get more of a share of a wallet of a given customer who has gotten infinitely more selective and has infinitely more choices than they’ve ever had.”

Digitization is helping some producers deal with changes in all these factors and their impacts on each other, “because this macroeconomic problem impacts supply and demand and everything in between,” Kenney explained. “Those end-to-end processes that consumer companies rely on — things like formulation, production planning, scheduling, distribution and promotion — are elongated processes and are very hard to pivot and change. Complexity is significantly greater than it’s ever been before.”

As the complexity grows, consumer product producers are looking to automate more processes, especially when they need to pivot quickly to change a formula, a supplier or any other step in a process.

“If you don’t have some level of automation and intelligence to help guide the decision-making, you can end up not only making the wrong decisions,” Kenney said, “you can end up causing disruption through your value chain.”

In the past, companies used optimization decisioning tools to balance one or two variables, such as available capacity and operating margin to maximize revenue, Kenney explained. Today, simple optimizations won’t work; the inter-reliance on the growing list of changing variables that producers face is prompting some to use artificial intelligence (AI) to help guide them.

“You have to have the ability to balance off multiple variables and come up with the best trade off decision in the moment,” Kenney said. “And because so many variables are happening across many aspects of the business, no one person can do that. Artificial intelligence is a way that a lot of companies express this multivariable optimization.”

Contact:
Ilaina Jonas, Senior Director of Global Public Relations, SAP
+1 (646) 923-2834, ilaina.jonas@sap.com

The U.S. Federal Reserve will likely raise rates for the sixth consecutive time today, Wednesday, to fight high , which is still running at its fastest pace in nearly 40 years.

SAP’s Take

“The Fed is continuing to increase interest rates to slow down the economy by making debt costlier,” explained AJ Shrestha, an economic policy expert in 51·çÁ÷Corporate Development. He said that this will result in consumers and businesses slowing purchases with debt as well as reduced economic activity overall.

What will another rate hike mean? For consumers, Shrestha said that increased interest rates mean purchasing a home or car will become more expensive. Also, refinancing a mortgage or student loan will become more costly. Credit card interest rates could also increase, so debt on outstanding balances may rise too. On the other hand, rising interest rates could mean better returns on savings accounts.

For home buyers, the rate hike will send financing costs higher. Thirty-year fixed-rate mortgages are already at their highest levels since April of 2002. Current home shoppers have lost considerable purchasing power as rates almost doubled since the start of the year. By some estimates, the increase in mortgage rates since the start of 2022 has the same impact on affordability as a 35% increase in home prices. That means if you had been approved for a $300,000 mortgage at the beginning of the year, you could now only afford a home priced at $200,000 or less.

While most businesses benefit from the Fed’s action to cool the economy to bring inflation down, which helps them manage costs, Shrestha says: “The higher rates translate to less access to capital to grow or expand businesses as financial institutions get increasingly tighter when making business loans in a volatile economic environment.”

The Fed is hoping that its actions will slow down the economy from the top down, but raising rates is an inherently indirect way to stabilize prices — so it is unclear how long it will take to see the impact on the economy.

There have been some positive signs, said Shrestha. “The labor market re-balancing is off to a good start, wage growth slowed down slightly and higher rates sapped the momentum in soaring house prices. These key initial signs could be a signal that we are on the path to reducing inflation and decreasing the odds of a recession.”

Is this likely to be the last rate hike? Probably not, according to Shrestha: “The Fed’s fast pace of rate increases has not slowed inflation down from its highest level since the early 1980s and so there will be more rate increases in the upcoming months and longer if inflation continues to persist at high levels.”

The Fed has increased rates five times since March 2022, and it is expected to increase them two more times before the end of the year: 75 basis points (bp) in November and another 50bp in December.

Fed officials have also indicated that they are willing to continue raising rates in early 2023 in order to meet a median interest rate forecast of 4.6% for 2023. Shrestha said that this implies an additional 25bp rate increase in February and 25bp in March.

Contact:
Ilaina Jonas, Senior Director of Global Public Relations, SAP
+1 (646) 923-2834, ilaina.jonas@sap.com

Last week the U.S. Dollar Index, which measures the U.S. currency against a basket of six peers including the euro and pound, rose to 114.75. It has slipped back a little since then, but is still at its strongest since early 2002 after gaining 20% this year.

The strong dollar coupled with global inflation, rising interest rates, and supply chain issues related to COVID-19 lockdowns in China are among the headwinds facing some companies and making investors nervous.

SAP’s Take

“There are several factors driving the dollar to gain strength against other currencies,” said AJ Shrestha, an economics expert on SAP’s Corporate Development team.

“The U.S. Federal Reserve has raised interest rates aggressively in a bid to bring down soaring inflation,” he noted. “The rising interest rates make the dollar more attractive to investors by guaranteeing a better return, so investors globally have recently been buying billions of dollars of U.S. bonds and the extra demand has pushed up the dollar’s value while dropping the value of other currencies sold to buy dollars.”

The dollar also has a reputation of providing a safe haven in times of economic distress. Higher energy and food prices, especially in the eurozone, have fueled recession worries and prompted investors to take refuge in the relative safety of the U.S. dollar, which is less exposed to some of the larger macro headwinds.

This flight to safety is driving the dollar’s value higher at the same time that several other currencies — including the British pound, the euro and Chinese renminbi — have come under pressure. The pound fell sharply after the new government rolled out a package of tax cuts, stoking investor fears about a burgeoning deficit, and the euro decline reflects concerns about energy supplies and inflation while the renminbi has fallen because of concerns about China’s slowing domestic economy.

“The Chinese economy has been depressed by a precarious real estate sector and disruptions from the country’s continuing zero-COVID policies,” said Shrestha. “In order to stimulate the economy, the Chinese central bank cut key interest rates, which is a very different path from what the U.S. is taking in response to economic issues at home.”

That divergence in policies should result in the dollar-renminbi exchange rate moving higher as the renminbi continues to weaken. A weaker renminbi helps make China’s exports more competitive in overseas markets, particularly the U.S., increasing demand. The lower prices for China’s manufactured goods should help reduce persistently high inflation in the U.S., benefiting American consumers.

Who are the other winners and losers from a strong dollar?

“Typically, a weak currency is seen as good news for export-heavy economies and bad for economies that rely on imports. So as the dollar strengthens, this is causing problems for developing nations, which depend heavily on imports of crude and other commodities that are priced in dollars and have become expensive in local currencies terms,” said Shrestha.

A strong dollar pushes import prices up, creating inflation in those regions and causing central banks to pursue an even more aggressive monetary policy stance in order to reduce demand, which in turn raises local borrowing costs.

For emerging economies with a large amount of dollar-denominated debt, a strong dollar is especially troubling. A strong dollar could make the cost of servicing this debt unsustainable in some of those countries, resulting in defaults — a risk highlighted this week in a report from the United Nations Conference on Trade and Development (UNCTAD). Furthermore, with rising rates in the U.S. and the dollar climbing, money will start to flow out of those countries, resulting in less investment.

Large U.S. corporations that operate in multiple countries could also be hurt because they become less competitive in overseas markets and their foreign sales lose value when converted back into dollars. U.S. workers in industries that are export-heavy, like agriculture or manufacturing, could also be impacted negatively.

But the European software giant is an exception to that rule.

Contact:
Ilaina Jonas, Senior Director of Global Public Relations, SAP
+1 (646) 923-2834, ilaina.jonas@sap.com

But no matter where nations are on the roller coaster of steep rises, dramatic declines, and seemingly stable plateaus, inflation brings wide-ranging impacts that vary across industry, geography, and supply chain design. Adequate liquidity for smooth business operations can be affected. Centralized banking actions on interest rates can ease or restrict short-term lending and borrowing activities. Even supply chain challenges can dissipate or intensify as costs fluctuate and inventory on hand becomes less or more expensive.

There is no simple, magical financial instrument that can help businesses plan around the realities of , but intelligent technology can help. Tools such as artificial intelligence (AI) and predictive analytics can help companies anticipate and see around the corners of their operation, simulate and prepare for multiple contingencies, and pivot their business models as needed. Best of all, they gain numerous options to understand economic circumstances, predict the impact, take near-term actions, and establish structures to secure a position of strength.

Below are three key areas where these types of technologies can help companies understand the impact of inflationary challenges, act quickly, and prepare for what’s next.

Move Cash with Intelligence and Confidence

The overall value of money and assets reduces in the future, and having cash sooner allows a business to quickly accomplish more. To mitigate this risk, companies must recognize the potential impact of various scenarios, ranging from rising prices on commodities to shortages of raw materials. This knowledge then needs to be translated into comprehensive and clear cash flow projections and flexible strategies that can be adjusted to manage liquidity shortfalls and surpluses effectively.

Using , now part of SAP, finance leaders can guide their business down the best-possible pathways. They can choose to adjust receivables and payables strategies or tap the lowest-cost credit line available from their banking institution. Plus, working capital assets can be unlocked with financial tools such as dynamic discounting and supply chain financing.

The working capital management solutions accurately reflect inflationary conditions with AI-enabled forecasts and updated views that are always available to the business planner. From planning and simulation to picking the right funding alternatives and controlling processes, these functions work synchronously to help ensure effective coordination of cash movements – using a single source of trust integrated smoothly across the enterprise.

While every decision boils down to the movement of cash, the combination of well rounded, real-time information, auto-generated possibilities, and predictive insights can help businesses make the best choices with confidence. And as their values change over time, goods and assets can be purchased and maintained in the future at the original price with a carrying cost that’s less than the inflation rate.

Limit Exposure from Global Differences

Different geographies rarely have the same experience with inflation, but a rise in commodity prices inevitably increases raw material costs. And in higher or unstable inflation regions, currencies can depreciate quickly, causing exchange rates to spike.

These global economic fluctuations can be particularly risky for corporations that have borrowed capital in response to low interest rates over the last few years. Inflation is already eroding their planned repayment strategy for outstanding loans. And additional exposure to another region’s instability can further exacerbate cost pressures, squeezing margins tighter and limiting access to cash.

With the application, treasury managers and financial leaders can monitor risk positions, commodity price changes, and currency conversion rates, even during the most volatile economic situation. They can develop compliant hedge accounting strategies with a complete audit trail, while staying compliant with regulations such as the Market Infrastructure Regulation (EMIR) and the most recent version of the International Financial Reporting Standard (IFRS 9).

Treasury teams can also gain insights to tackle debt and manage investments more effectively. 51·çÁ÷Treasury and Risk Management offers information such as available cash, balance risk, and return on investment (ROI) and monitors investments against potential interest rate fluctuations. In addition, borrowing and lending transactions through the life of a loan can be captured, analyzed, and reported as they occur.

Act Quickly Today and Prepare for Tomorrow

When the engineering and production of manufactured goods grow more expensive, businesses must decide on whether to reduce margins or pass additional costs to the customer. It is a tough choice, especially when people already feel financially overburdened.

By integrating solutions with , procurement, supply, and logistics organizations can get the insight they need to generate more revenue from every spend event and optimize cost reduction. Together, they can run simulations and what-if analyses to identify and engage trading partners with the capacity and expertise to handle emerging situations such as scaled-up production and further drive down financial and material waste.

Of course, effectively managing inflationary risks requires businesses to have access to the right data to make decisions and move their supply chains forward. The combination of 51·çÁ÷Digital Supply Chain and 51·çÁ÷Business Network enables companies to manage resources more strategically in ways that help increase productivity, decrease operating costs, and free up employees for more mission-critical work. In addition, organizations can get ahead of supply chain delays and downtimes to prevent revenue loss and avoid unforeseen costs with visibility into inventory and production capacity, asset maintenance, and logistics processes.

Come from a Position of Financial Strength

With recent inflationary events in mind, understanding and managing the financial risks in the supply chain play a significant role in the race for survival. And companies that can step up and make the right decisions at the right time are the ones that have clear visibility over their procurement, supply chain, and logistics data and processes.

For many organizations worldwide, 51·çÁ÷solutions are already one of the most effective means of protecting their financial strength during times of inflation. And they will continue to alleviate their challenges as the portfolio continues to evolve to meet the needs of a changing economy and competitive landscape.

Inflation impacts costs, interest rates, and supply chains worldwide. .

Neil Krefsky is head of Finance and Risk Product Marketing at SAP.
Haresh Chhaya is a Treasury and Working Capital solutions leader at SAP.
Max Hendrickx is senior director of the Working Capital Management Center of Excellence at SAP.
Eamon Ida is director of Business Network Solution Marketing at SAP.