How can businesses prepare for economic turbulence in 2023? Chief economists give their views
- The World Economic Forum Chief Economists Outlook, January 2023 finds that growth prospects remain anaemic and the risk of a global recession is high.
- The IMF expects around a third of the global economy to enter a recession in 2023 and it has cut its forecast of global GDP for the year to 2.7%.
- We ask three chief economists how business leaders can best prepare their organizations to weather the economic storms ahead.
Almost two-thirds of economists surveyed by the World Economic Forum expect there will be a recession in 2023. So what does that mean for businesses?
In a world of 'polycrisis', how can companies pivot to resilience, while staying profitable and sustainable?
These are some the questions that will be discussed during the Forum's Annual Meeting in Davos - and in the months ahead.
A survey of leading economists for the Forum's latest Chief Economists Outlook gauged views about some of the likely headwinds that businesses are going to face in 2023 - as well as the most effective responses to these headwinds and sources of optimism.
It finds that the outlook for the global economy is gloomy, with almost one in five respondents now considering a global recession to be extremely likely in 2023, more than twice as many as in the previous survey in September 2022.
This is backed up by the news that the International Monetary Fund expected around a third of the global economy to enter recession in 2022 or 2023 and it has cut its forecast of global GDP for the year to 2.7%.
But there is still some room for optimism. The chief economists surveyed as part of the briefing expected "the outcomes of the latest shocks to have been worse, the impending downturn to be relatively short-lived and the current resilience to form a cornerstone of future recovery.
Expectations of rough terrain
Businesses face a "triple challenge" at the start of 2023, according to the report: continued high prices of key inputs, alongside tightening monetary policy and weakening demand.
Almost all of the economists surveyed (nine out of 10) expect weak demand to exert a "significant drag on business activity this year", while 87% expect the same of elevated borrowing costs and more than 60% expect the same of higher input costs.
Of these, energy prices are a key factor, particularly in Europe, which threatens the competitiveness of the region’s producers and runs the risk of diverting supply chains and business activity away from the region.
Other potential business headwinds that could also impact this year include talent shortages, with 45% of respondents saying they were "somewhat or extremely likely" to exert a drag on business activity. But as businesses look towards cost-cutting measures, talent availability is expected to be less of a concern.
A lower proportion of respondents (36%) said they expected regulatory and policy uncertainty to impact business activity, while only 23% supply chain disruptions to have a significant effect.
We asked three chief economists how they think businesses should faceoff headwinds and manage the current economic turbulence.
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'Look beyond 2023'
Erik R. Peterson, Partner and Managing Director, Global Business Policy Council, Kearney
Business leaders have been focused on prospects for growth (or lack thereof), inflation, labour markets and the uncertain global economic outlook for quite a while. In my view, while remaining vigilant to unexpected short-term changes, they should already be looking beyond 2023 (as turbulent as it is likely to be) and positioning themselves for the time when governments and central banks turn to stimulating their economies.
The operative questions are when that will happen? How will it happen? And, what changes will have shaped the exogenous environment within which recovery efforts take place? My view is that recovery will begin in 2024, that the rate of recovery will be highly uneven across geographies and stages of development, that economic policymakers will be progressively constrained when it comes to the use of traditional fiscal and monetary tools and that additional downside contingencies (on top of the current geopolitical and other instabilities) could slow things down.
'True leaders will be called into action like no other time in the past'
Fernando Honorato Barbosa, Chief Economist, Banco Bradesco
Businesses will face a completely different economic environment from now on. We have not seen such a combination in decades: high rates; geopolitical uncertainties; energy insecurity; and, the need to rethink the global supply chains. Amid that, there is a need to innovate, protect the environment, become more inclusive and reskill the labour force. No CEO has the roadmap to address these challenges in a smooth and predictable way. They will have to take larger risks and, as usual, face the burden of their decisions.
"The long-term sustainability of a business has never been so dependent on these multidimensional factors. Taking care of its cash positions in an environment of worsening financial conditions is solely the starting point, but might not be enough to grant the survival of a company in this new era. Forging resilience, integration and financial robustness with an eye on the people and nature will be mandatory. The risk of de-globalization and acting to fulfil only the company’s own interests is real, but that is not in the best interest of society. Easier said than done, but true leaders will be called into action like no other time in the past.
'Prepare for recovery'
Ira Kalish, Chief Global Economist, Deloitte Touche Tohmatsu
The global economy will slow down considerably in 2023 with a moderate to deep recession in Europe, a modest recession or downturn in the US and historically slow growth in China. Inflation in North America will recede quickly. Inflation will decline in Europe, but at a slower pace. Labour markets are likely to remain tight even as economies slow. This will be driven by demographics, persistent COVID-19, lower labour force participation and much-reduced migration. Geopolitical trends will remain uncertain, thereby compelling companies to focus more on supply chain resilience and redundancy.
In my work, executives and many clients ask how they should prepare for a recession. My answer is that they ought to prepare for recovery. A recession might last nine months, but a recovery could last nine years. Many companies have strong balance sheets and can withstand a recession. Yet, when the recovery ultimately comes, they will need sufficient labour and technology to be competitive in a new post-pandemic environment. Indeed, the fact that hiring and investment continue to be relatively strong in some countries reflects corporate longer-term thinking and preparation for the new normal.