Western Europe Business in 2023

Western Europe Business in 2023: Trends and Insights

Western Europe remains a pivotal region for global business, and 2023 has brought significant developments, opportunities, and challenges. From economic recovery to technological advancements, the business landscape in Western Europe is evolving rapidly. Here’s a comprehensive look at the key trends and insights shaping Western Europe business in 2023.

High-likelihood risks will require greater focus on scenario planning through 2023–2024

Western Europe is set to see acute risks throughout 2023, stemming from both strong macroeconomic headwinds and rising political uncertainty. While these risks are not part of FrontierView's base case for the region, they highlight the need for greater focus on scenario planning in the medium-to-long term, especially because of their considerable impact on markets’ potential performance. Additionally, they underline the difficult operational environment that multinationals are set to experience in terms of both demand opportunities and operational costs.

• Government-mandated gas rationing in the EU (35%): While warm weather and high gas inventories will likely soften the need for European governments to implement strict rationing measures in the winter of 2022, ongoing supply issues and low LNG import capacity will continue to present significant issues during the winter of 2023. Additional risks to supply, such as disruptions to US exports or suspension of Russian LNG supplies, may prompt a period of acute gas shortages, which will require a much more considerable government involvement in energy consumption and result in rationing that prioritizes households and essential services throughout 2023.
• Spain's far right enters government (30%): The center-right People's Party (PP) is currently ahead in polls but isn’t projected to win enough votes to form a majority government. With the cost-of-living crisis forecast to continue into next spring, angry voters could vent their frustration by voting for Vox, a far-right party. If Vox secured a sufficiently large proportion of the vote, the PP could be forced to form a coalition with it, as happened on a regional level this year. However, Vox's nationalist stance could inflame tensions with Catalonia, one of Spain's wealthiest regions, boosting support for the separatist movement. In this scenario, heightened uncertainty would raise borrowing costs and weaken business confidence.
• Housing market crash in Nordics (30%): Elevated inflation and tighter policy rates in the Nordics can cause a sharper market correction, leading to a much steeper drop in housing prices, which will translate into a notable shock to regional banking and financial institutions. The latter would have wider spillover effects on the European banking system, leading to a sharper rise in lending rates and a drop in liquidity, exacerbating the economic shock.
• ECB hawkish policy (25%): The European Central Bank (ECB) hikes rates notably above the current projections of 3.0% by Q2 2023. The sharp tightening of monetary policy leads to a significant increase in yield spread between Northern and Southern European markets, increasing external borrowing costs and further dampening credit performance outlook. The sharp bond yield increase will dampen governments’ ability to provide additional fiscal support, deepening and prolonging the crisis.
• Italian populism exacerbates fiscal issues (20%): Prime Minister Giorgia Meloni's various missteps and attempts at moderation present an opportunity for Matteo Salvini to capitalize on her lack of authority. The League can expand its influence over the coalition, increasing tension with the EU and NATO. These developments rattle investors, raising Italy's borrowing costs. However, Italy won’t default on debt. In a worst-case scenario, the ECB and EU will massage the requirements for the new anti-fragmentation tool. Still, the prolongation of political instability will worsen the outlook for Italy's economy.
• EU/UK negotiations break down (15%): While both the EU and the new UK cabinet have signaled greater willingness to renegotiate the Northern Ireland Protocol, risks to the outlook remain. Should negotiations break down, the EU may seek to impose punitive measures on the UK, which will further dampen trade and investment activity and weigh on both the EUR and the GBP.
• Germany's coalition falls apart (15%): Broad disagreement over energy policy and the ongoing conflict in Ukraine may prompt the FDP and/or the Greens to exit the coalition, prompting a period of increased policy uncertainty and severely constraining the ability of the government to introduce necessary fiscal support.
• Netherlands increases gas output (15%): Under current plans, gas mining is set to decrease by 50% in 2023 and be completely suspended by 2024. Given the uneasy energy situation, however, the government may be pressured, both domestically and externally, to either increase the mining quotas or extend the gas fields’ utilization period. This should alleviate some of the gas supply pressures felt by the wider region, but it is unlikely to address the ongoing concerns over gas supply inventories in 2023.
• Early elections in France (10%): President Emmanuel Macron finds it impossible to implement even a watered-down version of his reform agenda due to an increasingly fractious legislature, forcing him to call an election this spring. Emboldened by another strong electoral showing, the far left and far right refuse to budge, prolonging a state of paralysis unless the Republicans, under new leadership after December's party election, prove more conciliatory. In the absence of a formal coalition, France becomes increasingly ungovernable, weighing on business confidence and, by extension, investment.

Economic Recovery and Growth

One of the most notable trends in 2023 is the ongoing economic recovery. After the disruptions caused by the pandemic, Western Europe is experiencing steady growth. Additionally, governments are implementing policies to stimulate economic activity. Moreover, sectors like manufacturing and services are showing resilience. Furthermore, consumer confidence is gradually improving. The region is also benefiting from increased trade and investment flows.

Technological Advancements

Technological advancements are driving significant changes in Western Europe business. Discussions at various forums highlight the role of digital transformation. Additionally, there is a growing focus on artificial intelligence and automation. Moreover, businesses are adopting cloud computing and data analytics. Furthermore, the rise of fintech and e-commerce is reshaping the financial and retail sectors. The region is also seeing increased investments in green technologies.

Sustainability and Green Business

Sustainability is a key focus for businesses in Western Europe in 2023. Companies are increasingly adopting green practices. Additionally, there is a push towards renewable energy and energy efficiency. Moreover, governments are implementing stricter environmental regulations. Furthermore, businesses are exploring circular economy models. The region is also seeing a rise in sustainable finance and green investments.

Market Trends and Opportunities

Market trends in Western Europe are creating new opportunities for businesses. The region is witnessing growth in the tech and healthcare sectors. Additionally, there is increasing demand for digital services and products. Moreover, the real estate market is showing signs of recovery. Furthermore, the tourism and hospitality industry is rebounding. Businesses are also exploring opportunities in emerging markets within the region.

Challenges and Risks

Despite the positive trends, businesses in Western Europe face several challenges in 2023. Economic uncertainties and geopolitical tensions are major concerns. Additionally, supply chain disruptions continue to impact various industries. Moreover, labor shortages and rising costs are affecting business operations. Furthermore, regulatory changes and compliance requirements pose challenges. Businesses need to adopt strategies to mitigate these risks.

Future Outlook

The future outlook for Western Europe business in 2023 is cautiously optimistic. Continued economic recovery and technological advancements are expected to drive growth. Additionally, sustainability and green business practices will remain key priorities. Moreover, businesses will need to navigate challenges and adapt to changing market dynamics. Furthermore, innovation and collaboration will be crucial for long-term success. The region is poised to remain a significant player in the global business landscape.