CEOs are being forced to abandon decades-old forecasting habits

Ikea boss Jesper Brodin says he’s not normally one to wallow in nostalgia. But at a pre-Christmas get-together for senior executives who used to work at the Swedish furniture group, he couldn’t help but join the chorus of those who said they missed the old days – when the world seemed relatively stable, trends were predictable and this could be translated into a more or less credible multi-year business plan.

“We always discuss whether it used to be better. I’ve always argued that now is better. This time we were more in agreement that it was better before,” he said. “The risks, the uncertainty, everything that used to be in a ‘risk matrix file’ has more or less materialised. . . We laugh at the time when we made one-year budgets and how we were right and wrong at 0.3 percent.”

Brodin’s reflections resonate in the corporate world. CEOs are struggling to understand the confusing macroeconomic signals. In Europe and the US, an economic downturn is accompanied by record low unemployment and labor shortages. Consumer behavior is a mystery: until recently, people kept spending even though the price of almost everything has increased.

Last year’s worst predictions about the economic crisis and energy shortages have not come true. But it feels uniquely hard to predict the path right now. There is little consensus on either side of the Atlantic about where the economy is headed, and it is harder than ever for publicly traded companies to guide the market. In the UK, accounting firms fear that the forecasts their corporate clients submit to them for approval are unassessable.

In the game of adapting to these new forms of chaos, some are better placed than others. In general, there is less pressure on private companies that do not have to publish profit targets.

Ikea, for example, changed course. Rather than setting specific goals for the year, there are a number of “scenarios” in place to give the company leeway as the outlook changes. It means acknowledging that very different outcomes are possible. “It teaches us agility in the way we work,” Brodin said.

A year ago, the 54-year-old expected customers to cut back on spending because of high energy bills and mortgage rates. That didn’t happen. Meanwhile, supply chain disruptions improved faster than expected, resulting in the group holding more inventory and in turn having to reduce the prices of some of its products.

“We’re celebrating that things are going in the right direction,” Brodin said, “but we don’t have a concept to predict exactly what’s going to happen 6 to 12 months from now.”

For Ikea, input costs are the most difficult to forecast. Transport prices have fallen. But Brodin did not count on this increased demand for wood burn as fuel, some of the company would provide materials more expensive.

It’s not just traditional financial modeling variables like inflation and consumer spending that are harder to predict. The past few years have also provided some unexpected lessons about how business and society deal with shocks and uncertainties.

“Look at what people have been through: the pandemic, the economic damage, the tragedy of war, the energy prices,” Brodin said. “What people may have underestimated is human resilience.”