When a new year dawned almost 6 months ago, the world had every right to expect calmer seas ahead. After all, we had collectively lived through two years of COVID-induced disruption, the likes of which the world had not witnessed in decades. Instead of a calmer more predictable landscape, 2022 has thus far presented nothing short of risk-induced bedlam!
The word bedlam is defined as a “state of uproar and confusion,” and I cannot think of a more apt description of the first half of 2022. Consider for a moment all of the risks that have come to fruition thus far this year that weren’t widely anticipated:
- The COVID Omicron Variant: As we closed the books on 2021, there was a sense of relief that the worst of COVID was behind. And while that may have been true, we were not out of the woods yet. A new variant (Omicron) emerged during December that was 4 times more transmissible than the Delta variant that preceded it. By January 1, it was the dominant variant in many countries around the world including the U.S. January and February would see a repeat of lockdowns and quarantines that we thought had been relegated to the past. As a result, economic recovery was stalled, productivity thwarted, and supply chains disrupted to start the new year.
- War in Europe: Of all the risks we didn’t see coming in the first half of 2022, the one that was the biggest surprise (and in many ways generated the biggest impact) was the Russian invasion of Ukraine in February. The drumbeat of war grew louder during the first days of 2022, but few believed that Russia would launch a full-scale offensive until it happened. As I wrote within days after hostilities began, “Russia’s invasion has already dealt a devastating toll on the people of Ukraine, and has rocked global financial markets, threatening to fuel an already worrisome inflationary environment in the United States and other developed economies around the world. Companies with a global footprint are scrambling to assess the business impact of developments in Europe – particularly on their supply chains and revenue.” If few thought the war possible, even fewer thought it would still be going in the summer. The war may be regional, but the consequences have been global.
- Surging Inflation: Inflation first raised its head in 2021, but was widely dismissed as “transitory,” and a phenomenon resulting from “base effect” price increases due to economies reopening in 2021 that were closed much of 2020. But, as we entered 2022, the true scope and persistence of inflation’s return became apparent. As I noted in a January blog, “nothing we do as internal auditors will likely impact the rate of inflation or eliminate the risks that inflation presents to the organizations we serve. Inflation is quite simply a macroeconomic phenomenon in which too much money is chasing too few goods and services. The circumstances that led to the resurgence in inflation are complicated, and a swift resolution by central bankers and policymakers is unlikely. What we can (and must) do is to assess the risks that inflation presents to the ability of our organizations to achieve their objectives. Where risks are significant, we should assess and provide assurance on the effectiveness of risk-mitigation strategies and controls.” Since January, inflation has gotten progressively worse. War in Europe has exacerbated inflation on a global basis – particularly the cost of fuel and other commodities.
- Great Resignation Induced Talent Shortages: Talk of the “great resignation” has been ongoing since 2020, but few expected such severe talent disruption would extend deep into 2022. As the year has progressed, executives have begun to realize the “great resignation” is not a short-term phenomenon. According to a recent World Economic Forum (WEF) report, a survey of more than 50,000 workers in 44 countries and territories suggests that the great resignation is set to continue. The WEF reported that 1-in-5 workers say they’re likely to move to a new employer in the next 12 months. The report’s findings that 35% of employees plan to ask for a raise in the next year doesn’t bode well for the inflation outlook.
- COVID Lock Downs in China: As Time Magazine recently reported, while much of the world has navigated the COVID pandemic with a combination of quarantines, lockdowns and vaccinations, China embraced “a stringent Zero-COVID policy focused on stamping out every infection, rather than mitigating severe illness and deaths.” The results have been lockdowns of major metropolitan centers in 2022 on a scale not seen anywhere else in the world. The risks and consequences for the rest of the world are becoming increasingly clear. Massive lockdowns in the Chinese economy fuel supply chain disruptions and threaten the long-term global economic outlook. The World Health Organization and others are questioning the long-term sustainability of a zero COVID policy in the world’s most populous country.
Nothing thus far in the blog should be a surprise, yet these events have continuously caught boards, management, risk managers and internal auditors by surprise in 2022. Looking forward to the second half of the year, more surprises almost certainly await. While it is true that much of the risk-induced disruption we have experienced thus far stems from two overarching events (COVID and war in Ukraine), the risks have taken on a life of their own spawning second- and third-order risks that continue to unfold. And it is likely that many of these events will yield more risk-induced disruption in the months and years ahead.
It would be presumptuous for me to predict the unexpected risks that will emerge rapidly in the coming months, but there are clues all around us. As I often coach internal audit professionals, we must keep our eyes on key risk indicators at all times. Those which offer some of the best clues for future risks include:
- Economic forecasts
- Geopolitical and geoeconomic trends
- Organizational strategic business risks
- Planned corporate/organization initiatives
- Legislative and regulatory outlook
- Industry trends
The first half of 2022 has been a roller coaster. The future is clouded with economic, political/geopolitical, and regulatory uncertainty. Keep your antennas up and your eyes on the horizon to afford the best chance of navigating the bedlam that still lies ahead.