The recession collision course is gaining momentum

Economists are warning that there are global mounting concerns that we are heading for a financial crisis similar to the one experienced in 2008. With increasing energy prices, and a global cost of living crisis, the outlook for many economies is very bearish.

There are pertinent signs that we are heading for a recession. The response to this crisis will be interesting.

Bet the house on it

The article by the World Economic Forum (WEF) points out that almost two-thirds of chief economists believe a global recession is likely in 2023; of which 18% consider it extremely likely – more than twice as many as in the previous survey conducted in September 2022. A third of respondents consider a global recession to be unlikely this year.

There is, however, a strong consensus that the prospects for growth in 2023 are bleak, especially in Europe and the US. All of the chief economists surveyed expect weak or very weak growth in 2023 in Europe, while 91% expect weak or very weak growth in the US. This marks a deterioration in recent months (at the time of the last survey, the corresponding figures were 86% for Europe and 64% for the US).

Taming the Chinese dragon

The WEF article adds that, in China, expectations of growth are polarized, with respondents almost evenly split between those who expect weak or strong growth. Recent moves to unwind the country’s highly restrictive zero-COVID policy are expected to deliver a boost to growth, but it remains to be seen how disruptive the policy shift will be, particularly in terms of its health impacts.

On inflation, the chief economists see significant variation across regions, with the proportion expecting high inflation in 2023, ranging from just 5% for China to 57% for Europe. Following a year of sharp and coordinated central bank tightening, the chief economists said they expect the monetary policy stance to remain constant in most of the world this year. However, a majority expect further tightening in Europe and the US (59% and 55%, respectively). They noted that 2023 is likely to involve a difficult balancing act for policy-makers between tightening too much or too little.

“With two-thirds of chief economists expecting a world-wide recession in 2023, the global economy is in a precarious position. The current high inflation, low growth, high debt and high fragmentation environment reduces incentives for the investments needed to get back to growth and raise living standards for the world’s most vulnerable,” said Saadia Zahidi, Managing Director at the World Economic Forum.

“Leaders must look beyond today’s crises to invest in food and energy innovation, education and skills development, and in job-creating, high-potential markets of tomorrow. There is no time to lose.”

Multiple headwinds

The article points out that multiple headwinds are also expected to exert a drag on business activity in 2023. Nine out of 10 respondents expect both weak demand and high borrowing costs to weight on firms, with more than 60% also pointing to higher input costs. These challenges are expected to lead multinational businesses to cut costs, with many chief economists expecting firms to reduce operational expenses (86%), lay off workers (78%) and optimize supply chains (77%).

More broadly, the chief economists expect the global landscape to remain challenging for businesses – 100% of respondents expect global geopolitical trends to continue redrawing the map of global economic activity along new geopolitical fissures and fault lines. This wider economic shift will likely reverberate through trade, investment, labour and technology flows, creating myriad challenges and opportunities for business.

The article adds that one positive signal is that supply chain disruptions are not expected to cause a significant drag on business activity in 2023.

While the Forum’s Global Risks Report 2023 recently found the cost-of-living crisis to be among the world’s most urgent risks, the chief economists see the crisis potentially nearing its peak, with a majority (68%) expecting it to have become less severe by the end of 2023. A similar trend is evident in relation to the energy crisis, with 64% expecting some improvement by year end. In addition, survey respondents highlighted a number of potential sources of optimism at the start of 2023, including the strength of household finances, growing signs of easing inflationary pressures and continued labour-market resilience.

Taking stock of your capabilities

How companies respond to this crisis will ultimately determine the length of the crisis. There was a long tail recovery from the 2008 Global Financial Crisis mostly because companies had never faced a crisis like it in recent history.

With this in mind, many companies will remember the lessons that they learned in 2008 and will know that this will be a period of austerity and investing in company systems and processes that will improve their corporate governance.

The first place to start is an independent business review. This will provide you with a 360° view of your business. Armed with this information, you will be able to capitalize on your businesses strengths and focus on any areas where your business can improve on.

From there, it is important that companies look at their cash management system and international trends regarding best practice principles. This will ensure that your company has the cash reserves to weather the impending economic storm.

Is your operating model keeping up with digital trends? Early adopters of digitisation found that it was a tough transition. However, the lessons that they learned in the process can be adopted by other companies. Your transition does not need to be significantly disruptive.

If you are managing group treasury, you need to ensure that  your transfer pricing and cross guarantees do not risk the solvency of your group. This is an area where financial management systems are severely lacking. Tracking your exposures across facilities, guarantees and suretyships is vital. A health check of your exposures will help assess your divisional liquidity and solvency requirements.

It is time to ensure that your business’ financial health is as strong as it can be. The next 18 months are going to be difficult.

Robin Nicholson is the Director of Corporate-911 and is a Senior Business Rescue Practitioner