Volatility has become the norm. If there is any certainty, it’s that after a chaotic three-year run the global economy is heading for a prolonged slowdown. While the length and breadth of the recessionary environment may differ from region to region, it’s clear that nearly all businesses will be touched in some way by the broader downturn.
Members of the Criticaleye Community offer their thoughts on the macro trends and pressure points that will impact business decisions over the next 12 months.
This is what they had to say:
The global economy will suffer a continuing slowdown with the hope of a recovery at the backend of 2023.
It's probably worth reflecting on the current economic situation in the context of Covid. While we did see a dramatic bounce-back, there was always going to be a slowdown afterwards. So, you have this big decline, then a dramatic recovery as activity came back online, and then things just slow down. And there's a big bill to pay for Covid.
The UK Government probably borrowed £400 billion more than it would otherwise have done, and other European countries are in very similar situations. And that does mean – unfortunately – constraint on Government spending. It means tax rises and it also means inflation because there's a lot of cash still sloshing around the system. There was always going to be a kind of Covid slowdown and a bill to pay for the pandemic. And then when you overlay the war in Ukraine and the Russian oil and gas crisis, you can see why we are heading for a downturn.
I think the hope would be that we get through this current interest rate tightening cycle, with rates potentially peaking in the Spring next year. Then we might start seeing a recovery towards the back end of 2023, with rates potentially starting to come down and then 2024 will be a stronger year for growth. But 2022-23 is likely going to be a period of stagnation with maybe a mild recession, and then we’ll start seeing some recovery.
Mui Hoon Poh, Board Member, Singapore Pools and Board Mentor, Criticaleye
Asia region will feel the impact of high interest rates, supply chain issues and geopolitical tensions.
Globally, 2023 will continue to be uncertain. With the continuing pandemic, the war in Ukraine and high inflation, things are not looking so bright. Profitability will be squeezed while corporate investment will likely slow amid rising interest rates.
Asia will also bear the brunt of high interest rates. In addition, the geopolitical tensions between the US-China, China-Taiwan, North Korea-South Korea and the political uncertainty in Southeast Asia will continue to cast a shadow over economies in Asia. Companies are looking elsewhere to reduce reliance on China. India may stand to gain from this move by companies looking to diversify risks. With the depressed valuations, it is also possible that some companies may take the opportunity to snap up strategic assets and position for the next upturn.
Many industries are still plagued by supply chain issues that emerged during the global shutdowns caused by Covid and have only got worse due to the war in Ukraine. To combat this and stay afloat, companies need to improve their resilience in any way that they can. This means reducing exposure to volatile market pricing of commodities, as well as building protective measures into supply chains to deal with shortages and rising logistical costs.
Devyani Vaishampayan, Non-executive Director & Audit Chair, Norman Broadbent Plc and Board Mentor, Criticaleye
Employee engagement and retention will be high on the agenda for businesses.
Some of the main barriers to growth include the Russia-Ukraine conflict and the energy crisis, but also the impact of that on food and other areas relating to the cost-of-living crisis. I think everyone knows there will be a recession, but there is uncertainty about how deep and how long it’s going to be, and that is making it difficult for CEOs and businesses to plan. I think planning is going to be more short term rather than over a three-year period, because of the uncertainty around the economic recovery.
I think one of the key challenges for Boards now is workforce shrinkage and talent shortages. The UK employment rate is now lower than it was before the pandemic. And that is a big factor, because if you combine that with inflation and economic uncertainty, it is a big risk for businesses. In addition, there is the ongoing challenge of changing patterns of work. Employers are still trying to grapple with hybrid working and how to improve productivity. Equally, employee engagement and retention are getting to be more of a problem. If you combine those two or three things, I think workforce talent and skills is going to be a key challenge for any business over the next 12 to 18 months.
The UK needs to invest more in skills, particularly STEM skills. Growth is very dependent on technology and innovation, so I think investment in STEM skills has to be a priority. The government also needs to focus on getting the over 50s back into the workforce, because that is something that’s been impacted quite a bit after Covid.
Decarbonisation of the energy system will deliver myriad benefits to governments and consumers.
It's been a very volatile, challenging period and I think the next 12 months are going to have similar characteristics. I've seen comments talking about energy prices that will persist for two years before they settle back down, but that is still relatively uncertain.
Investment in renewable energy will underpin energy security while also contributing to a decarbonised energy system in line with government targets. It has the added benefit of mitigating the volatility of fossil fuel prices, which makes energy prices more stable and affordable. People often see investment in infrastructure as a thing that will increase costs, but if you’ve got a renewable energy system, fossil fuel prices can fluctuate but the price of electricity will be tied more towards renewable energy costs.
The macro environment is uncertain and that may continue for a time. We need to do everything we can to work towards delivering government goals for the benefit of consumers and stakeholders. Decarbonising the electricity system, investing faster and on an unprecedent scale, will be a critical part of that.
Sandra Breene, President - Regional Delivery, Croda International Plc
Sustainability will be a major growth area for businesses in 2023.
The economic outlook in the next 12 months is extremely difficult to predict, with high inflation in most countries. Consumer demand will slow but the extent to which that happens will depend on employment rates.
The relaxing of the zero-Covid policy in China will also help to boost demand – if it continues. Another big driver for growth is sustainability and the need to replace unsustainable products with ones that are more protective of the environment. Younger people are a strong driver for growth in this area as they are often better educated in the choices they can make.
Supply chain issues have been a key element in limiting growth in the last two years, particularly due to the Covid restrictions in China. It is unclear as to how quickly the difficulties in supply will fully unravel, so they could continue to be a barrier to growth. Finally, a lack of capacity to produce is a barrier to growth for us – and many industries – as demand has been extremely strong in most regions after Covid.
I think the most important thing that I need to do at the current time is to provide focus and discipline to ensure the team globally are aligned with our strategic priorities and do not get distracted by the other initiatives that present themselves in this rapidly changing environment. I also need to help create an organisation that accepts change readily and can be flexible and adaptable to changing customer needs.
Making the right decisions around more sustainable investments in a time of cost control due to inflationary pressures is also an important aspect of leadership today.
Leaders must be aware of burnout in these challenges times.
It is going to be a difficult period. Everything you hear is amplified in Boards at the moment. The pressures are multiple, especially on margin and cash flow. The other side of it is burnout and workload, because more tension and pressure mean more things can go wrong.
On the flipside, good leadership will differentiate in this market because, in a lot of ways, when the sun is shining it's quite easy to be a leader. I think when it's hard and difficult, good leadership does come to the fore. It means you need strong operational skills and resilience in your workforce. But overall, I think it'll be a really hard time for leadership this year.
You’ll also see a focus on productivity and a tightening up of the right behaviours. Within that, there will be good businesses that disappear if they don't deal with things quickly. In a tough environment, cost saving measures will look at the people-to-income ratio. Businesses are recognising that they need to drive the income up and drive the people cost down, which is why we've got wage challenges going on.
Interest rates are oxygen for growth businesses and they’re going to remain high for some time. I think investors will look for businesses that have solid, cash generative models. Outside of that, you’ll see valuations go down. Technology will continue having a tougher time, but the big winners will be cleantech and anything to do with the energy transition.
That’s going to be the big growth area and anything coming out of universities in that space will be able to attract significant investment.
Managing through volatility is becoming the new normal.
We are planning a real acceleration on the digitisation of our business, whether it’s on the demand side, supply side or the back-office side. When I say digitisation, I mean creating personalised relationships with our consumers. Our entire organisation needs to evolve into a new digital world, so there's a large degree of upskilling that's required specifically on digitisation.
The second big shift that I see us focusing on is retaining and attracting talent, because millennials will make up almost 50 percent of the workforce by the end of next year. How do you attract, retain and develop talent which is very different to the previous generation? The third thing is going to be managing volatility. Previously in organisations you set budgets and people managed to those budgets, but now we will need to have an organisation that manages to volatility, so as our business gets better and the external macroeconomic factors become more stable, we can invest ahead of the curve.
If the macroeconomic environment worsens, or inflation continues to increase, then we will need to cut budgets.
We will need a lot more agility in managing our business models and decisions.
Arya Ghassemi, Content Intern, Criticaleye
Bridgette Hall, Senior Editor, Criticaleye
Jacob Ambrose Willson, Senior Editor, Criticaleye
