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The global economy: Storm clouds gather; silver linings remain

It was never going to be pretty. The global economy entered 2022 facing a “grim outlook”, as World Bank president David Malpass said at the time, with countries still reeling from or in the midst of the COVID-19 pandemic.


For many, the worst of the pandemic seems to have passed. The outlook, though, is not so bright. In January, the World Bank forecasted global growth would slow to 4.1 per cent in 2022 from 5.5 per cent in 2021. Its latest forecast has revised that to just 2.9 per cent.


The war in Ukraine has exacerbated the slowdown risking a “protracted period of feeble growth and elevated inflation”, its June analysis said, with a real risk of stagflation not seen since the 1970s. The head of the IMF, meanwhile, warned at the start of the World Economic Forum in Davos in May that the global economy faced its “biggest test since the second world war”.

For businesses, a battle lies ahead.

Challenges on all sides

We face a “confluence of calamities”, as the IMF’s Kristalina Georgieva put it. Most notable is inflation. In the US, it hit a 40-year high of 8.6 per cent in May; in the Eurozone, it was 8.1 per cent. In the UK, with inflation also at a decades-high, the Bank of England now expects it to reach 11 percent this year.


Moreover, inflation is the symptom, but businesses also suffer the causes: excess demand and continued disruption to supply chains that, in some cases, are not simply pushing up costs but restricting availability. In some sectors, businesses are finding they cannot get hold of essential materials, goods or services at any price. From a shortage of semiconductor chips threating the car industry, to a lack of timber grinding construction projects to a halt, businesses are finding it more challenging than ever to satisfy customer demand and generate revenue.


Furthermore, the war in Ukraine, sanctions and rise in fuel prices have led to a critical shortage of fertilizer, as well as restrictions on the ability to move grain around the world. As a result, we are seeing the threat of a global food crisis begin to emerge.


Likewise, staff shortages – as well as demands for pay increases in the face of inflation – are not just pushing up the cost of labour but also constraining growth. Recent figures from Barclays bank showed 94 percent of hospitality and leisure businesses are struggling to recruit personnel. Similarly, the Structural Timber Association (STA) recently warned that the problem with stocks of materials was not as great as long-term issues surrounding the workforce for the global construction industry.


The good news is that while prices are likely to stay high this year and through 2023, we’re probably not seeing a return to the 1970s. The world isn’t quite so hostage to oil supply from a few nations as it was then. Indeed, the relative energy independence of the US is one reason to suspect it has a better chance of avoiding a recession this year than Europe and the UK, hit harder by the impact of the ongoing war in Ukraine on gas supplies within the region.)

The bad news is the causes of inflation are more varied and complex – a lack of labour mobility, logistics issues, continued pandemic restrictions in Asia, rising protectionism (which predates the pandemic or the war) and overheated consumer demand. There’s no silver bullet and a lot of moving parts. A lot could still go very wrong, too, whether that’s wage-price spirals pushing inflation ever higher, a new COVID variant, food shortages as a result of the war or even higher energy costs when winter hits.


Even if, as central banks predict, inflation does start to ease next year, the cure is unlikely to be much more welcome than the disease: Higher interest rates and slower economies reducing consumer demand. Businesses need to flex their models and assumptions, hoping for the best but preparing for the worst.


Don’t let a crisis go to waste

If it sounds bleak, though, there is a consolation: If they face a rocky road ahead, many businesses start from a strong base.


First, not only are interest rates still historically low, despite recent rises, but most businesses continue to have pretty low debt levels. Moreover, alternative finance remains plentiful. As of April, analysts Preqin put the global dry powder in the private equity sector at $3.4 trillion: A record amount looking for investments.


And while the risk of recession is very real, for now at least insolvencies start from a low base. Corporate bankruptcies in the US were at a record low in the last year, for instance.


There will, of course, be plenty of exceptions. Some companies and whole sectors are carrying significant debt. The construction industry, for example, is often heavily leveraged. For these businesses, even small rate increases significantly impact the cost of operations.

Meanwhile, while they remain low historically, there are signs of insolvencies increasing; in the UK in May, they were up by a third on the number registered in the three previous years. Globally, the increase in accelerated sales, with businesses urgently selling off unprofitable parts or looking to generate capital before the market moves against them, has also been striking.


Finally, it’s also true that some businesses are better placed to weather the storm than others: RSM’s US Middle Market Business Index over the past two years has suggested the smaller end of the market – businesses with under $5 million in revenue – have faced greater struggles in adapting to challenges such as supply chain issues, worker shortages and inflation.


Nevertheless, furlough payment and other business support during the pandemic mean there are businesses that remain in a strong position – much stronger in some cases than in previous downturns. Moreover, history shows there are winners as well as losers from economic uncertainty and even recessions. For all the challenges, there are opportunities for profitable business: for vertical and horizontal integration; to buy out competitors at good prices; and to develop and dominate markets.


Companies with resources, profitability and – crucially – the flexibility to adapt quickly to these opportunities as they arise may find that the outlook is not so very grim after all.

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