Skills, inflation and supply chains top CEO concerns for 2023

After two years of pandemic-induced interruptions, 2022 was a more stable and successful year for Australian business. While Australian business leaders are cautiously optimistic for 2023, they are readying plans to adjust to the challenges expected in the coming year.

Now in its tenth year, Ai Group’s annual Australian CEO Survey provides critical insights into business experiences over the past year, and how business leaders expect the coming year to evolve.

Our 2023 CEO Survey has revealed that businesses consolidated the post-pandemic recovery in 2022. Business conditions, turnover, employment and investment all improved as the dislocations of the COVID era gradually abated.

However, business leaders also contended with a new set of ‘supplyside’ challenges, as rampant inflation, chronic labour shortages and supply chain disruptions weighed heavily on performance. Business leaders have reported declining margins due to these supply-side pressures.

It is a testament to the resilience, flexibility and innovation of Australian business that we successfully navigated the challenges of post-COVID recovery in 2022.

There is, as always, a wide range of views about how 2023 will play out. But our Australian CEO Survey reveals several common themes that Australian business leaders largely agree on.

On balance, employers go into 2023 with cautious optimism. They expect business conditions and performance to improve again on the strong results of 2022. Despite the headwinds facing the Australian economy, business leaders are undertaking ambitious investment plans to adjust to the new market realities of the postpandemic era.

However, they also identify three challenges which will define their priorities in 2023:

1. Historically tight labour markets, which have exacerbated chronic staff shortages, particularly for skilled roles.

For the first time in the history of our CEO survey, staff training is the top investment priority. 90% of CEOs expect to be affected by staff shortages in 2023. They intend to invest in staff training and development to grow their in-house skills base.

In contrast, more conventional types of investment such as physical CAPEX — buildings and equipment — or research and development ranked very lowly for 2023.

This illustrates one of the hidden costs of the skills crisis in Australia today. As businesses are redirecting their investment plans to workforce, there's not much left over for growing industry or doing R&D. Given Australia ranks fairly poorly on international league tables for R&D, this could have significant implications for our future competitiveness in five to ten years’ time.

2. Continuing inflationary pressures, which have crimped business margins and eroded profitability.

Perhaps unsurprisingly, given the national and global inflationary context, in 2022 business leaders reported the fastest rises in industry prices ever seen in the history of the Ai Group CEO survey. And businesses are expecting inflationary pressures of the past two years to continue, particularly for energy.

Investment in process improvements and technology are already underway to manage the effects of cost pressures on the balance sheet: in terms of investment priorities, improving business processes was ranked second, while ICT investments were ranked third. While not strictly workforce, these investment priorities are in fact also very much related to skills shortages. Process improvement and ICT allow for a more effective deployment of a business’s current workforce and help adjust to conditions in which labour supply will remain constrained.

3. Supply chain disruptions, which have persisted through 2022.

Business leaders have elevated supply chain resilience to be a top priority and nearly 90 per cent of CEOs plan to make a supply chain investment this year, looking to improve their logistics practices, cultivate new suppliers, and adjust their product offerings to manage this ongoing challenge.

Just under 20% of businesses say they plan to find new suppliers while a quarter of businesses say their only strategy is to increase their prices to recoup supply chain costs — effectively passing them on to customers.

A quarter of businesses might sound like a lot, but it is actually a worryingly low number. Given 79% of businesses say they're currently affected by supply chain problems, it tells us that most businesses don't expect they can recover those additional costs via pricing. The balance sheet is going to have to wear the difference. Our survey demonstrates that it will clearly be another challenging year for many businesses and the need for a relentless focus on productivity across the broader policy agenda has become even more important.

The strategies businesses deploy and their investment priorities are critical for Australia to achieve the economic resilience needed for prosperity in a time of global economic uncertainty.

The Federal Government in particular will also need to put productivity and flexibility at the forefront, especially when considering the further changes to workplace relations it plans to introduce later this year. We need to catch up on years of below-par productivity growth and we need to gear ourselves for at least a return to 1990s level growth. aigroup.com.au