Finding the High in the Low – Economic Analysis

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Signs of an economic slowdown are growing.

Stock markets had their worst half since the financial crisis. The S&P 500 fell 20% and the NASDAQ 30%. Bond yields have widened and funding markets have become much more constrained.

Commodity and transport prices, which heralded spikes in inflation and an overheated economy last year, are now at 52-week lows, suggesting weaker demand and a likely economic slowdown .

In our 17th annual survey of the world’s leading restructuring experts – the professionals most experienced in responding to declining economic volatility – 87% expect a recession in the next 12 months, and 1 in 4 expect it before the end of the calendar year.

Long-term constraints to growth

We all hope that the impending recession will be short and mild, but even after the eventual recovery, there are many reasons why future economic growth could be lower than that of the past decade. Population aging and a shrinking workforce in much of the developed world and in China are a combination of factors that could limit long-term growth. We are also unlikely to return to a world of zero interest rates and quantitative expansion, which helped propel growth after the financial crisis and during the pandemic. Growing frictions in international trade, finance and data will also hamper future growth.

The Chinese economy, in particular, will be key to watch. Over the past 20 years, China has been responsible for 40% of global economic growth, with the United States and Europe combined accounting for around 20%. If China enters a period of slower growth, this will be a significant constraint on the global economy.

Protect yourself against the downside

In the short term, you need to take proactive steps to actively manage your business for a possible recession.

A few movements without regret:

  • Cash flow is a leading indicator of market trends and the health of businesses. Build liquidity reserves to ensure resilience in the face of market volatility.

  • Renegotiate supplier prices. Input prices fall in most categories. Be sure to pay true market costs. Don’t be a price taker.

  • Spend time running what-if analyses. What would a recession be due to your business? What actions should you take?

  • Categorize the trading levers you would use in a downturn: 1) easy to reverse; 2) difficult to reverse; and 3) mission critical. In a recession, pull the levers in the reverse order of the potential damage each will do to the business.

Prepare for the rise

The future of any business lies in revenue generation and growth. Driving these results in a slowing economic environment is, of course, a tall order. But the rapid pace of disruptive change — especially the acceleration of new technologies, business models, and consumer behaviors — requires agility and continued investment in the areas that will drive future growth for your business.

Here are four areas to focus on:

1. Consider strategic options

Slowdowns create a buyer’s market. What market changes would you make to reshape your market, if you could? By planning ahead, you’ll be quicker to act when opportunities arise.

Do you have lines of business that are underperforming, have less long-term potential, or are otherwise a distraction? Staying the course and divesting your business of non-core activities is key to driving growth in the future. Private equity is sitting on over $1 trillion of dry powder, and while the environment may be challenging over the next few months, their appetite to deploy that capital will lead to a pick-up in business activity.

2. Speed ​​up your digital metabolism

Digital capability will soon – if it hasn’t already – be the foundation of all successful businesses everywhere. Digital must be part of your company’s metabolism. It is the cornerstone of the organization and everyone’s responsibility.

But like any investment, you need to make sure you get a positive return on your digital dollars. Focus on the business problem. It should be manageable, measurable and scalable. Start small, experiment, then scale quickly if successful.

3. Stay customer-centric

Continue to invest in your customers and put them at the center of your strategy. Use the data you have on them well. Put in place the right operating models, metrics, and processes to connect with your customer across all touchpoints, while minimizing increases in customer acquisition and fulfillment costs. For retail consumers, this can mean optimizing your omnichannel experience and services. For B2B, this can mean investing in customer success customer service models. But either way, losing focus on your customers during an economic downturn is a surefire recipe for disaster.

4. Create tomorrow’s workforce

And invest in your staff. Labor markets will remain tight and the battle for top talent will continue.

Start building the workforce you need versus what you have. Be creative. Find various abilities in atypical locations and train in the skills you need. Many jobs that need to be done have never been done before, so you can’t always expect to find experienced workers to fill the roles.

Your workforce is your greatest asset. Investing to make it thrive will help create the energy you need to thrive and grow in this challenging environment.

Be action oriented

Building on the disruption and continuing to invest in the future of your business, despite a slowing economic environment, will not be easy. But failure to do so can lead to long-term decline or loss of control over your future.

I cannot predict how severe the current downturn will be. What we as business leaders can do is prepare as best we can by hedging against the current downside, but also investing for the future that we know is on the other side. .

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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