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2024 trends
Five trends to drive business and finance in 2024
Global trends
What will 2024 bring for you and your business? IMD faculty and other experts offer their predictions for the year ahead.
The outlook for 2024 remains cautious. Karl Schmedders, IMD’s Professor of Finance, considers five themes that are likely to dominate the business landscape.
The pressure on business leaders remains significant as recovery from the disruption of the COVID-19 pandemic remains slow. Rising interest rates have only recently begun to get a grip on the stubbornly high inflation that has plagued the global economy, and the threat of recession remains.
The push for sustainability, especially within the European Union, means that companies that have not yet engaged with the green agenda will be forced to do so. At the same time, technology continues to evolve and throws up new ways of doing business.
Here are five themes that will shape the business environment over the next year.
Chances of a recession remain elevated in developed markets
Although US President Joe Biden certainly doesn’t want one going into an election year, the chances of a recession in the US are high. Traditionally, when there is an inverted yield curve in the bond market – when short-term debt instruments have a greater yield than longer-term bonds – there is an increased likelihood of recession. An inverted yield curve has been in place in the US market since mid-2022.
The risks of an economic downturn in the US are not helped by party politics. Mike Johnson, the new Republican speaker of the House of Representatives, takes a harder line than his predecessor Kevin McCarthy, and a government shutdown remains a threat until the end of January. Were millions of US government employees furloughed, then that would accelerate a recession.
In Europe, although inflation is declining – it fell to 2.9% in October according to Eurostat – there is also an inverted yield curve for Euro-denominated debt. Germany is already in recession. The influential German Council of Economic Experts expects the economy to have shrunk by 0.4% in 2023, and although the IMF believes that it could recover in 2024, pressure remains on the country’s manufacturing sector. That will have a significant impact on other economies within the greater Euro area and could pull more of the Eurozone down.
Companies in Europe must get on top of CBAM legislation
Companies operating within Europe will have to pay attention to the carbon border adjustment mechanism (CBAM) which moved into its transitional phase at the beginning of October. The system becomes permanent at the beginning of January 2026. Firms need to get ready to pay. From that date, importers will need to declare both the volume of their imports into the EU and their embedded greenhouse gas emissions.
Companies are really struggling with the implications of CBAM. Many are not sure how it impacts them and there are frequent complaints they have not received enough guidance.
To give just one example, take the aluminum conglomerate Emirates Global Aluminium. Headquartered in Abu Dhabi, the company produces aluminum, which is then sold predominantly to the European market. For each ton of aluminum that the company smelts, it produces 7.5 tons of carbon emissions. Based on the current price of carbon, this means that from the beginning of 2026, it will have to pay €80 per ton of carbon emissions. Emirates Global Aluminium has estimated that the total annual impact on its bottom line would be €400-500m, which would kill the company’s margins.
“Companies operating within Europe will have to pay attention to the carbon border adjustment mechanism (CBAM).”
Companies need to ask themselves whether CBAM means that they should give up on Europe altogether or invest heavily in new forms of manufacturing. Either way, it is legislation for which they need to plan.
European companies will need to take Scope 3 emissions seriously
Companies within Europe will need to rethink their supply chains as the Corporate Sustainability Reporting Directive (CSRD) comes into force. To create a common framework for sustainability reporting, companies will have to submit Scope 3 emissions data – those connected with a company but outside its direct control – in the 2024 financial year for the first time, for reports published in 2025.
This is an EU initiative that will have a huge financial impact on individual companies. To give just one example, it will dramatically affect any company that relies at all on shipping. A notoriously dirty industry, shipping remains wedded to diesel fuels. The technology for batteries or electric power is not effective, hydrogen technology is not developed enough, and no one wants to go down the route of nuclear power.
But given the dramatically higher costs of this kind of carbon leakage – quite apart from the double whammy caused by CBAM above – European companies could consider walking away from international business or perhaps pooling their international trade. Certainly, it will force them to consider how their supply chains work.
Companies will develop the business case for blockchain technology
Although I don’t expect major breakthroughs in companies that use blockchain, the next year will see business cases for distributed ledger technology maturing and evolving. The last year has been a terrible one for carbon offsetting, for example. Scandals at Washington DC-based Verra, the world’s leading certifier of carbon credits, and pressure on the voluntary carbon market have seen companies pull back from carbon credit schemes.
With its transparency and ability to avoid problems like double accounting – where the same emissions reductions are claimed by multiple organizations – this is precisely the kind of problem that companies that use blockchain can solve. It can also help artificial intelligence find its niche. At the start of 2023, there was a great deal of hype about the business use of large language model-based technology like ChatGPT.
Although debates about how that technology will be used remain, what is certain is that data will always be needed. Some companies are looking at the business cases of using federated data analysis, which uses blockchain technology to preserve privacy when analyzing data by carrying out the task without sharing the underlying data. I am expecting more and more companies to prove that they have viable business cases using this technology.
There is a refinancing problem on the horizon
A concern for economists, banks, and business leaders is whether a wave of corporate bankruptcy is coming. Before the COVID-19 pandemic, high-yield companies in the US – those rated BB or lower – could borrow debt at below 4%. Rates are now up to around 8%. It was a similar story in Europe with rates below 3% in the summer of 2021 (and 7-8% now). If central banks like the US Federal Reserve are serious that they intend to maintain the higher-for-longer interest rate environment to tame inflation, then companies will have to refinance their debt at much higher rates.
Bear in mind that policymakers have hiked rates by around 400 basis points in developed markets since 2021 and around 650 basis points in emerging markets. S&P Global Ratings estimates that $106.7bn of high-yield nonfinancial debt matured in 2023. That more than doubles to $247.7bn next year and jumps again to $389.3bn in 2025. The financing burden will be heavy and could push some companies into the arms of non-bank financial institutions where interest rates are even higher. An increased debt burden on companies could create more zombie companies – those where cash flows are below interest rate payments – which in turn could lead to a wave of bankruptcies.
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