Corporate resilience will face tough test

Organisations must create risk mitigation strategies for the coming year, but at the same time be prepared for surprises that will need extreme agility to navigate

The last two years have proved how resilient organisations have been. Most companies responded with great agility to a WFH (work-from-home) mode. Per a McKinsey survey, it took an average of 11 days for most organisation to pivot. Velocity of innovation reached an incredible level when in just nine months a COVID-19 vaccine was developed. It usually takes years for a vaccine to reach the market from R&D stage. Technology companies reaped a bonanza, as digital transformation became an urgent survival issue for enterprises.

Nevertheless, 2023 brings with ita convergence of interconnected risks that will put this resilience to some serious test. It will be worthwhile for organisations to create risk mitigation strategies for 2023, but at the same time be prepared for surprises that will need extreme agility to navigate.The war in Ukraine also remains a key storyline for the global economy. The most important channel is that the restricted supply of Russian natural gas has created an energy crisis in Europe. This crisis appears to have tipped some European economies into recession, and that has major implications not only for those economies, but also for their trading partners.

Tech layoffs

As 2022 draws to a close, global IT organisationsare grappling with challenges of over-hiring and are forced to lay off thousands of employees.More than 91,000 workers in the US tech sector have been laid off in mass job cuts so far in 2022, according to a Crunchbase News tally. However, Gartner forecasts an increase of 5.1% in global IT spend in 2023. That’s up from 0.8% growth in 2022, but well down from the 10.2% increase the previous year. Layoffs in India has seen 17,989 employees beingfired by 52 start-ups, including unicorns like BYJU’S, Chargebee, Cars24, LEAD, Ola, OYO, Meesho, MPL, Innovaccer, Udaan, Unacademy and Vedantu. India’s unemployment rate rose to a three-month high at 8% during November, according to data by the Centre for Monitoring Indian Economy (CMIE).The unemployment rate in urban India was higher at 8.96 per cent, while in rural areas, it was at 7.55 per cent, as per CMIE.

Weak global growth

On the economic front, the weakness of growth will top the agenda, with global growth slowing to 2.0%. Risks are tilted to the downside. Fitch Solutions forecast a sharp slowdown in global growth from 3.2% in 2022 to 1.9% in 2023, marking a slight revision lower from our previous forecast of 2.0% in November. Excluding the Global Financial Crisis and the COVID-19 pandemic, this would be the worst outcome for the world economy so far this century. Historically, global growth of less than 2.0% has been considered a global recession.

Purchasing Managers’ Index (PMI) data point to further weakness in private sector activity. The S&P Global composite PMI remained below the expansionary 50 mark in November in the largest Developed Market (DM) economies. In the US, the composite PMI has moved further into negative territory, coming in at 46.4, from 48.2 in October. This was a fifth consecutive decline in US private sector activityand was driven by sharper contractions in both services (46.2) and manufacturing (47.7).

Most analysts predict that the US economy could experience a full-year contraction in output in 2023, which, combined with a slow easing of inflation, means that monetary policy would remain tight in an environment of a sharp slowdown in growth. This could lead to a sharp increase in financial market volatility, as well as weaker growth in China and the eurozone.

Chinese economy loses steam

The Chinese economic recovery lost steam in November. The administration’s see-sawing on its zero-COVIDpolicy has created huge concerns and once again raised supply chain risks. China’s short- and medium-term economic recovery will continue to be largely affected by its COVID-19 policy. Regional outbreaks of COVID-19 in some provinces and important cities –such as Shenzhen, Beijing and Sichuan province – have disrupted production (affecting supply chains) and held back consumers’ willingness and ability to spend. Although the lockdowns in these places were lifted in Q3 2022, new outbreaks in provinces such as Guizhou, Xizang Inner Mongolia, Xinjiang, Sichuan, Guangdong, Gansu and Ningxia have led to renewed confinements under the country’s aggressive zero-COVID policy. This is affecting consumer confidence as well as investment and industrial production.

Key Growth Risks towatch forin 2023

• Rising energy prices that would lead to tighter monetary policy.
• Deeper US recession resulting in weaker growth, dragging on major trade partners and global economy.
• Financial shock followed by a sharp and sudden tightening of financial conditions in response to stress at country, sector- or market-wide level.
• Slower Chinese growth renewing a supply chain crisis.
• Military escalation by Russia leading to greater uncertainty and continued supply chain risks.
• Geopolitical risk involving US-Iran, US-China, Cross-Straits tensions creating greater trade/military uncertainty.
• Semiconductor supply chains restrictions could increase as exceptions expire in 2023. This could lead to production shortages and inflation.