Brilliance in Resilience Part 4: Energy and Inflation Disruptions

In an era of unprecedented turbulence, European companies are confronting a multitude of challenges, particularly in key industries. The world has never felt more uncertain, fraught with risk, and vulnerable to disruption. How can businesses adapt, evolve, and thrive in these volatile times? What is the best model of organizational resilience to adopt? These are the questions at the core of the Brilliance in Resilience blog series. In this fourth instalment, we delve into the issues of the tightly linked energy and inflation disruptions.

The energy crisis

In 2023 and early 2024, the global energy crisis continued to evolve, driven significantly by the fallout from Russia’s 2022 invasion of Ukraine and the resulting disruptions in natural gas supplies to Europe. Before the war, Russia supplied over 40% of the EU’s natural gas, but this dropped sharply after sanctions were imposed. Russian pipeline deliveries fell by an additional 38 billion cubic meters in 2023. This led to severe energy shortages across Europe and unprecedented price hikes. Keisuke Sadamori, the IEA’s Director of Energy Markets and Security, emphasized the gravity of the situation:

By the second half of 2023, energy prices began to stabilize somewhat. Eurostat reported that average household electricity prices in the EU slightly decreased to €28.5 per 100 kWh, down from the first half of 2023, although still significantly above pre-crisis levels. Similarly, gas prices for households dropped from €11.9 per 100 kWh in the first half of 2023 to €11.3 per 100 kWh by the year’s end. Despite this moderation, gas prices remained much higher than in previous years.

The effects of the energy crisis have extended far beyond price increases. European cities like Paris began turning off iconic lights early, such as the Eiffel Tower, to conserve energy and raise awareness of the shortages. In Germany, public light displays were scrapped, and several countries, including Spain and Belgium, imposed limits on heating temperatures. Governments have also been forced to implement relief packages to mitigate the impact on households, while others, like France, have capped electricity prices to prevent further economic strain.

Recognizing the severity of the situation, Switzerland created a new energy crisis unit and began constructing emergency reserve power plants in late 2022. These measures reflect the urgent need for self-sufficiency in energy production as Europe braces for future uncertainties. Despite efforts to reduce gas consumption by 15% and fill gas storage tanks, concerns persist that these reserves may be depleted by the end of winter, making refilling them more challenging for the summer of 2023.

The energy crisis has had a profound impact on energy-intensive industries. For example, Arc International, the world’s largest glass tableware manufacturer, was forced to shut down half of its gas-powered furnaces, switch to diesel power (raising its carbon footprint by 30%), and furlough one-third of its employees. The ripple effects of these disruptions spread throughout the company’s supply chain, impacting transport companies, packaging factories, and retailers. This case illustrates how the energy crisis has evolved from a sector-specific issue into a broader economic challenge affecting numerous European industries. One of the CEOs interviewed expressed that:

Inflation disruptions

The energy crisis, compounded by supply chain disruptions and the war in Ukraine, has contributed to record inflation across Europe. By September 2022, inflation in the EU reached an all-time high of 10.9%, far surpassing the EU’s historical average of 2.09%. Eurostat’s October 2022 report identified energy as the leading driver of inflation, followed by food, alcohol, and tobacco. Countries like Belgium, the Netherlands, and Spain experienced inflation rates above the EU average.

Inflation has not only eroded consumer purchasing power but also destabilized the broader economy. The euro’s depreciation against the US dollar further exacerbated the situation, making European exports less competitive while increasing the cost of imports. In response, the European Central Bank (ECB) has adjusted its GDP projections downward for 2023, anticipating a modest 0.9% growth, down from an earlier estimate of 3.1%. In a worst-case scenario involving a complete cut-off of Russian gas and oil supplies, the ECB predicts negative growth of -0.9% for 2023. Christine Lagarde, President of the European Central Bank, addressed the severity of the issue:

Following recent developments, the ECB initially projected annual GDP growth of 3.1% for 2022, which was later revised to 2.8%. For 2023, the bank expects growth to be around 0.9%, with a rebound to 1.9% in 2024. However, in a worst-case scenario involving a complete cut-off of Russian energy supplies and limited alternative sources, the ECB warns that 2023 could see a contraction of -0.9% GDP growth.

Given the current state of several European economies, many experts are describing these crises as recessions. Indicators such as the Market Eurozone Composite PMI index, which tracks business trends in manufacturing and services, have signaled an economic downturn. In October 2022, the PMI index dropped to 46.4 for the euro area, marking the steepest fall in private sector activity since February 2021. Peter Schaffrik, Macro Strategist at RBC Bank, commented:

Another indicator, the Sentix Index, which reflects investors’ market expectations, also indicated a pessimistic outlook. In October 2022, the Sentix Index for the euro area fell to -38.3 points, the lowest since May 2020, showing that many investors view the market as uninvestable.

Navigating the future

The twin crises of energy and inflation are reshaping the European economy, forcing businesses to adopt new resilience strategies. As energy prices remain volatile and inflation disrupts markets, companies must rethink their supply chains, energy dependencies, and operational costs. Many organizations are exploring alternative energy sources, investing in energy-efficient technologies, and reassessing their global supply chains to reduce vulnerability to external shocks.

As we continue exploring resilience, our next blog will focus on the role of digital innovation in helping organizations navigate these turbulent times. Stay tuned for more insights into how businesses can prepare for and adapt to ongoing and future disruptions.

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In our next blog Part 5 we’ll spotlight key sectors and explore how they are navigating disruption. Don’t miss out on critical strategies to help your business thrive and secure long-term success.

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