Here’s what the mixed economic messages mean for business

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Emma Charlton, Writer, Forum Agenda

• Uncertainty means companies need to prepare for range of possibilities, says consulting firm Bain.
• Two-thirds of those surveyed for the World Economic Forum’s Chief Economists Outlook expect a global recession in 2023, but they also cited high levels of uncertainty.
• Businesses need to plan for multiple scenarios and be prepared to react quickly, Bain recommends.

The ever-shifting global economy is never easy to keep up with – but with sky-high inflation rates and global supply chains still upended by Russia’s invasion of Ukraine, it can be harder than ever.

Putting such shifts and more into context is the focus of a report from consulting firm Bain & Company, which presents various scenarios for the global economy and outlines different strategies for navigating them.

Drawing on the Purchasing Managers’ Indexes (PMIs) – a gauge of whether activity is expanding or contracting – Bain said there are some positive signs. But it also cautioned that levels of unpredictability are high.

“All the ingredients for continued interest rate hikes and uncertainty are present,” write the authors, led by Karen Harris, Managing Director, Macro Trends Group, New York. “And recent ructions in the financial market make timing more uncertain, leaving central banks, businesses, and investors to navigate the currents.”

Lots of uncertainty and economic headwinds Image: World Economic Forum

Downside risks

In its most recent update, the International Monetary Fund also warned that turbulence was on the up and that the economic situation is fragile.

“The fog around the world economic outlook has thickened,” the Fund said, as it predicted that global growth will fall to 2.8% this year from 3.4% in 2022, before edging back up to 3% in 2024.

Against the uncertain backdrop at the start of the year, the World Economic Forum published its Chief Economists Outlook: January 2023 and cited “challenges of historic proportions”.

Even so, those surveyed saw “tentative grounds for optimism, including the prospect of an easing of the cost-of-living and energy crises by the end of this year”.

Nine out of 10 respondents to the Forum survey said weak demand and high borrowing costs will weigh on businesses, with more than 60% also pointing to higher input costs. These challenges are expected to lead multinational businesses to cut costs.

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Economic and geopolitical risks

For Bain, the continuing uncertainty means that business leaders have to be prepared to handle anything – including economic and geopolitical risks.

It outlined potential scenarios, including the “perfect landing” where central banks raise interest rates just enough and demand remains robust enough to avoid a meaningful recession.

A major factor affecting the outlook is the central bank rate increases, which have occurred at the steepest rate in recent history in the US and EU, the Bain report said. Several national indicators of consumer confidence also remain low, it said.

In past recessions, successful companies have restructured costs before the downturn, invested selectively and pursued a proactive mergers and acquisitions (M&A) pipeline, the report said. Those that have struggled have cut costs too much, strayed too far from their core offering, or waited too long before reacting to the downturn, it said.

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Getting ahead of the game and planning for the worst scenarios is key, the Bain report goes on to say.

This includes: stress testing to gain clarity on what would happen in different situations; gaining clearer visibility on spending to aid decision-making; strengthening balance sheets and being ready to shore up liquidity and invest in M&A.

While there’s much uncertainty and much for company executives to grapple with, what is certain is the factors are very finely balanced and firms should be preparing for anything.

“It is critical that business leaders prepare plans to handle a wide variety of risks – both economic (inflation, recession, and capital costs) and geopolitical (trade tensions, sanctions, and war) – that could threaten many business models,” the report said.