As broadly expected, the first half of 2023 was a rocky ride. A fundamental shift in the economic landscape, not least the end of low interest rates, is causing some major headaches for governments, Boards and consumers. 
 

The War in Ukraine, tensions between China and the US and ongoing faults in the global supply chain continue to create pressures that effect decisions made in the Boardroom. Here, a range of business leaders share their thoughts on inflation, climate change, military conflict, access to finance, artificial intelligence and why we might need to strap ourselves in for the remainder of 2023 and beyond: 

 

Peter Arnold, Partner, UK Chief Economist, EY 
 

EY’s Item Club predicts further interest rate increases and muted growth in the UK.

In the US, inflation was largely driven by a post-Covid rebound and fiscal stimulus meeting supply side constraints, whereas Europe was more exposed to the increase in energy prices following the War in Ukraine. The UK faced the worst of both worlds, plus it’s feeling the effects of underlying structural issues in the labour market, making inflation stickier than in other global economies. Moreover, resilient consumer spending and business activity, which have prevented a recession in the UK so far, have also likely kept inflation higher than expected.   
 

The EY Item Club is predicting further interest rate rises this year, although by mid-2024 we may see rates coming down. However, rates will stabilise at around four to five percent rather than falling back close to zero – we’ll have to get used to these historically normal interest rates again. Inevitably, this will affect the corporate landscape. For companies that have borrowed on a fixed rate, particularly to finance deals, there will be a period of painful refinancing as the new debt becomes unaffordable; assets valued in a low interest rate world will need revaluation and the private equity model itself – that has benefitted from relatively cheap debt – will need to be re-assessed.   
 

The EY Item Club forecast for UK GDP for the remainder of 2023 and into 2024 is downbeat, with continued slow growth. Economic headwinds will move away from cost and margin pressures and will instead come from the dual impact interest rates will have on the consumer and corporate sides. Around two million households will refinance over the next 12 months, which means consumer discretionary spending power will be significantly reduced. On the corporate side, executives will be thinking more about managing their financial position and liquidity in the face of higher interest rates. 

 

Venkataramanan Anantharaman, Non-executive Chair, Ecom Express and Board Mentor, Criticaleye 
 

Interest rates in Asia have flatlined, but climate events and geopolitics will continue to impact global inflation. 

Inflation across the globe is stubborn. Extreme climate events and geopolitics will both impact inflation rates. Central banks have increased interest rates, with further increases in the US and UK not being ruled out. In contrast, interest rates in Asia have paused. Growth in India and China is the result of government investment in infrastructure and allied areas, rather than consumption. 

In this environment, consumer discretionary spending has gone down. Fortunately, in the previous low interest rate environment, most companies raised equity so the stress to corporate balance sheets is minimal.  

Concurrently, I think the private sector is approaching new capital expenditure with caution. One thing to consider is that the impact of higher rates has not filtered through in areas such as mortgages; when mortgage rates get reset, financial stress on consumers is expected to increase.  

Geopolitics is changing and new alliances are being made. Nothing is fixed, everything is transient. There is a lot of talk in the West – and even in India – about trying to be self-sufficient and to decouple from China. However, the reality is that China has created such large capacities and economies of scale that the world will continue to depend on China for manufactured products and intermediates. So, for the most part, I don’t see change on the horizon. 

 

Steven Cooper, CEO, Aldermore Group 
 

The UK is facing a prolonged period of low growth. Boards must prioritise the bottom line while supporting staff and customers.

In the UK, a recession is looking increasingly unavoidable. Even if a recession is avoided, we are in for a prolonged period of very low growth. This is combined with continued inflation, which brings the prospect of increasing costs and difficulties in generating revenue. The blend of a tight labour market and post-Brexit disruption means inflation is hitting harder in the UK than elsewhere.  

Interest rates are having a significant impact for some. We are seeing fewer businesses investing as debt becomes much more expensive. Households have been struggling with a greatly reduced disposable income, meaning they are spending a lot less. While this hasn’t fully come through the economy yet, it will do within the next 12 months. Conversely, individuals and organisations with lower levels of borrowing have been less impacted by interest rates. When interest rates do eventually peak, they won’t come down anywhere near as low as they have been. The ‘benign’ environment of very low interest rates is long gone and is unlikely to return within our lifetime. 

 

 

Mary Jo Jacobi, NED, Savannah Resources and Board Mentor, Criticaleye 

North America’s economy is in a strong position comparative to other regions. Geopolitics and the rise of AI will continue to dominate the macro.

I had predicted that a recession was likely in North America in the first half of 2023. While I’m relieved to say I was wrong, it feels like the inevitable has been delayed, with many forecasting a recession in the next 12 months. US consumers remain active, supply chain pressures have stabilised and inflation is declining, so North America looks strong relative to the rest of the world. 

However, as the US moves towards the 2024 Presidential election, I expect unease and nervousness to dampen economic activity. 

The rapid shift from the Covid economy to the wartime economy has tested the resolve in Boardrooms across the world. Indeed, the ongoing War in Ukraine has been a shock to the economic system, slowing growth last year to just over three percent. The longer the war drags on – with its huge, unbudgeted expenditures – the greater the likelihood of taxpayers growing weary in the context of the cost-of-living crisis.  

Beyond the war, China remains a concern as it expands its sphere of influence in the Global South in response to its domestic economic weakness. The two-theatre threat of Russia and China could challenge large corporations to reign in their globalist tendencies in the coming months.

 

Matthew Blagg, CEO, Criticaleye 
 

Interest rate rises will start to have implications for consumers and businesses, but growth opportunities remain. The US will act as a bellwether for the global economy.

There's definitely been a tightening economically, but I think businesses have traded fairly well in the year so far. There’s been cost inflation coming through, but they’ve generally been able to push it on to the customer. Headcount numbers have generally been flat, but the question is what comes next? The implications of interest rate increases are slower to come through than most people think. You've also got inflation in certain markets remaining high. You are seeing it come down now, which is positive. 

There is still lots of capital around and that means there will be opportunities for sustainable growth, although there is a danger that the heightened risk environment makes businesses overly cautious. To take advantage, you must have a tight understanding of your environment and be quick to react. There are obviously net gains; the drive towards AI is significant and the reality of that is it's linked to cost reduction and efficiency … 

The big thing to watch for is the US market. If the US market powers through, this won't be as significant a downturn as previously thought. If the US deteriorates, then I think there's a bigger implication. That's the big question mark as we go into the autumn when a significant amount of debt is due for refinancing. I think that's a key indicator for anyone looking at their own business.