The Global Economy: Storm Clouds Gather; silver linings remain

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

For many, the worst of the pandemic appears to be over. The outlook, however, is not so bright. In January, the World Bank predicted that global growth would slow to 4.1% in 2022, from 5.5% in 2021. Its latest forecast revised that figure to just 2.9%.

The war in Ukraine has exacerbated the slowdown risking a “prolonged period of low growth and high inflationsaid his June analysis, 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 was facing his “greatest test since the second world war”.

For businesses, a battle is looming.

Challenges on all sides

We are faced with aconfluence of calamitiesas Kristalina Georgieva of the IMF put it. The most notable is inflation. In the United States, it hit a 40-year high of 8.6% in May; in the euro zone, it was 8.1%. In the UK, with inflation also at its highest in decades, the Bank of England now expects it to hit 11% this year.

Moreover, inflation is a symptom of this, but businesses are also suffering from its causes: excess demand and continued disruption of supply chains that in some cases not only drive up costs but limit availability. In some sectors, companies find that they cannot obtain essential materials, goods or services at all costs. Whether it’s a shortage of semiconductor chips threatening the automotive industry or a lack of wood-chipping construction projects, companies are finding it harder than ever to meet customer demand and generate revenues.

Additionally, the war in Ukraine, sanctions and rising fuel prices have led to a critical shortage of fertilizers, as well as restrictions on the ability to transport grain around the world. As a result, we see the threat of a global food crisis beginning to emerge.

Likewise, staffing shortages – as well as demands for wage increases in the face of inflation – not only drive up the cost of labor, but also limit growth. Recent figures from Barclays bank showed that 94% of hospitality and leisure businesses are struggling to recruit staff. Similarly, the Structural Timber Association (STA) recently warned that the material inventory problem was not as severe as the long-term labor issues in the global construction industry.

The good news is that while prices are expected to remain high this year and into 2023, we likely won’t see a return to the 1970s. The world isn’t as hostage to a few nations’ oil supplies. that he was then. Indeed, the relative energy independence of the United States is one reason to suspect that it has a better chance of avoiding a recession this year than Europe and the United Kingdom, hardest hit by the impact. of the ongoing war in Ukraine over the region’s gas supply.)

The bad news is that the causes of inflation are more varied and complex – a lack of labor mobility, logistical problems, persistent pandemic restrictions in Asia, a rise in protectionism (which predates the pandemic or the war) and overheated consumer demand. There are no quick fixes and lots of moving parts. A lot could still go very wrong, whether it’s wage-price spirals pushing inflation ever higher, a new COVID variant, food shortages as a result of war, or even higher energy costs. high when winter comes.

Even if, as central banks predict, inflation begins to decline next year, the remedy is unlikely to be much more welcome than the disease: higher interest rates and slower economies reducing the consumer demand. Companies need to adjust their models and assumptions, hoping for the best but preparing for the worst.

Don’t let a crisis go to waste

If that sounds bleak, however, there’s a consolation: if they face a rocky road, many companies are starting from a solid foundation.

First, not only are interest rates still historically low, despite recent increases, but most companies continue to have fairly low debt levels. Moreover, alternative finance remains abundant. In April, analysts at Preqin estimated the global dry powder in the private equity sector at $3.4 trillion: a record amount looking for investment.

And while the risk of recession is very real, for now at least insolvencies are starting from a low base. Corporate bankruptcies in the United States hit a record high last year, for example.

There will, of course, be many exceptions. Some companies and entire sectors are heavily indebted. The construction sector, for example, is often highly indebted. For these companies, even small price increases have a significant impact on operating costs.

Meanwhile, while they remain historically low, there are signs of rising insolvencies; in the UK in May, they were up by a third on the number recorded in the previous three years. Globally, the rise in accelerated sales, with companies urgently selling off unprofitable coins or looking to raise capital before the market turns against them, was also striking.

Finally, it’s also true that some companies are better positioned to weather the storm than others: RSM’s U.S. Mid-Market Companies Index over the past two years has suggested that the smallest segment of the market – corporates with less than 5 million in income – had to face greater difficulties. adapt to challenges such as supply chain issues, labor shortages and inflation.

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

Companies with the resources, profitability and, most importantly, the flexibility to quickly adapt to these opportunities as they arise may find that the outlook isn’t so bleak after all.

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