Preparing for Protracted Stagnation

Protracted economic uncertainties will throw up certain intrinsic business challenges

A confluence of factors that are adversely affecting global economic activity – continued supply chain disruptions, the Ukraine crisis and a rise in global inequality and protectionism has brought down expected global GDP growth rates from 6% in 2021 to an 3.2% in 2022 and 2.7% in 2023, according to the International Monetary Fund – asharp downgrade to forecasts from even a few months ago. The IMF writes that this “is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic.”

Global economic activity experiencing a broad-based and sharper-than-expected growth slowdown (with inflation higher than in several decades) has pushed up costs considerably, with global inflation expected to surge to an average 8.8% in 2022 before falling to 6.5% next year and 4.1% in 2024. Based on some private estimates, the inflation rate for 2022 is expected to peak at a staggering 7.1% in developed economies and 9.8% in emerging markets. The IMF writes:

“Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.”

Back to the 70s?

According to the World Bank, the current state of economic affairs resembles in part that seen during the 1970s in three key aspects: a protracted period of accommodative monetary policy in major economies followed by supply-side disturbances fuelling inflation, weakening growth prospects and increased vulnerabilities that developing and emerging economies face with respect to monetary policy tightening needed to rein in inflation (such as weaker exchange rates from higher interest rate differentials owing to safe-haven currency flight). Consulting giants AT Kearney writes:

“Sustained global low growth would have far-reaching implications for advanced and developing economies alike. Labour market imbalances could persist, inequality within and among nations could grow as high debt levels mount, and opportunistic politicians could capitalise on fear of resultant crises.

However, it is not too late to improve growth prospects by using mechanisms such as monetary policy to protect the vulnerable, promoting free trade to combat protectionism, and on the geopolitical front, pushing for a swift resolution to the conflict in Ukraine.”

Business implications?

If weak growth is to persist, however, the world will be in for a combination of economic, political and social challenges that may prove to be particularly enduring, especially as countries continue to get more and more autocratic in nature. Growing instances of nationalism and protectionist policies is only going to exacerbate issues of low growth, inequality and compound geopolitical challenges between nations.  ‘

Mechanisms, including promoting free trade, carefully managing global interest rate hikes, and building foreign exchange reserves could help overcome a few of the said issues. Further, implementing policies to ensure racial minorities, women and other oppressed groups are “represented properly in government decision-making could alleviate some inequality challenges. Setting up legal standards to better protect workers could also help combat labour market imbalances. If these issues are not tackled, the world could land in a state of asymmetry that further strains governments, businesses, and populations alike.”

• Keep an eye on the US dollar: Given current and upcoming monetary policy volatility (especially with regard to the US dollar), strategic firms must monitor their transaction levels with the dollar (as well as their exposure to dollar risk) – especially in developing nations with high levels of government debt.

While some firms such as Burberry have seen sales bolstered by a strong currency, American corporations with a large global footprint, such as Nike or Microsoft, have taken a major hit while converting foreign sales back to dollars. Trimming back costs will be crucial to managing volatility in this period.

• Reassess procurement policies as asymmetries mount:Kearney writes, “procuring from countries that are better positioned to withstand a sustained low growth environment will be crucial over the next five years. These might include markets that have strong foreign currency reserves and that have high labour productivity.”
• Prioritising consumer and employee needs during economic uncertainty: In order to mitigate the discomfort of increased costs to customers, consumers must use strategies such as price bundling to draw in customers to a lower monthly (vs individual) price point. Furthermore, a weaker labour market suggests the need for businesses to have stronger HR policies to both attract as well as retain talent amidst a wave of possibly required layoffs.

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