Madrid, December 19, 2022.- The slowdown in the world economy can be seen in all the macro figures of the main countries. Whether it is a technical or short-term recession, we will have to prepare to face its consequences in 2023. First, let’s look at some diagnoses:
The Business Times:
“As we head towards the start of a new year, warning signs that the global economy is headed for a recession are flashing bright red. For one, the US Treasury yield curve remains deeply inverted, with both the 10-2-year as well as the 10-year to three-month Treasury spread sitting at -77 basis points and -83 basis points (as of Dec 4) respectively. Historically, the shape of the yield curve is considered to be one of the most consistent and reliable indicators; it has predicted all five US recessions since 1980. Furthermore, the likelihood of a recession tends to be greater the deeper the inversion and the longer the curve stays inverted, a situation that we are experiencing today”.
The World Bank:
“Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies. To achieve low inflation rates, currency stability and faster growth, policymakers could shift their focus from reducing consumption to boosting production. Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction.”
“Europe is battered by an energy crisis and by other effects of the war in Ukraine. Britain looks particularly vulnerable, not least because of the painful drag of Brexit plus needless bungling by the government. Everywhere is still suffering the after-effects of covid-19, not least on supply chains. In various economies this week we’ll get new figures for GDP growth in the third quarter. China faces an especially grim challenge—with big consequences for its economy—as it tries to avoid more protests, but also mass deaths among its poorly vaccinated population, a risk of easing lockdowns. We have written in depth about the dilemmas facing Xi Jinping in our recent cover story. I’d also recommend a recent podcast, Drum Tower, where our correspondents discuss the protests they witnessed. This is a story that will continue to run. Talking of recession, how bad will things get for white-collar workers? That’s the question raised by our latest article on the American economy. A heads-up: those in offices (real or remote) need not be too concerned. After all, most rich countries are in the unusual position of suffering low or negative growth while also enjoying remarkably high levels of employment. Jobs numbers in America last week gave a further reason for cheer. With the Fed hinting at a more dovish path, there’s one part of the world that can be more optimistic. In Ukraine, meanwhile, we have a new report on the challenges of winter. As Russia destroys infrastructure, leaving people without heat, electricity or water, it will be those who rely on social services—the elderly especially—who are at biggest risk. We won’t let up in our regular coverage of life on the ground in Ukraine”.
And after predictive analysis of what will happen in 2023, companies and employees have to implement change measures. JP Morgan notes these keys:
1. Watch data for warning signals—and stay nimble
Manage the risks within your control and retain a flexible cost structure and business model. Be proactive and devise an action plan for any potential slowing of sales and profits:
- Explore risk-reduction strategies, including forward buying of inputs or locking in interest rates.
- Identify discretionary expenses and overhead you can reduce or defer to maintain margins without sacrificing long-term growth plans.
- Think about near-term adjustments to your strategy, pricing or product mix that might help you weather the storm.
- Consider negotiating agreements with strategic suppliers or explore outsourcing functions to a vendor that may be more efficient.
2. Maintain a fortress balance sheet
Maintaining a financial bill of health that can withstand shocks is paramount in a recessionary environment.
- Focus on maintaining adequate liquidity to sustain your business through a downturn.
- Consider proactively refinancing debts that are coming due within the next one to two years.
- Balance deploying excess COVID-era liquidity with maintaining a buffer for downturns.
- Maintain a dialogue with lenders to provide updates on business performance and cash management.
3. Be bold and take advantage of volatility
A downturn is more of a buyer’s market, creating unique opportunities for some companies.
- Consider opportunities where you can take advantage of the equity market valuation premium for scale, growth and strong margins.
- Lower equity prices may provide an opportunity to acquire undervalued assets.
- Cash consideration can be used to deploy excess liquidity.
- Equity consideration can be used to take advantage of near-record equity multiple dispersion and minimize downside risk.
Each economic recession obeys different variables. For example, the one of 2008 had a financial and real estate origin (bankruptcy of Leman Brothers). Fifteen years later, the looming economic recession maintains imbalances in the supply chain from the years of the Covid19 Pandemic and the Ukraine-Russia war in central Europe. In short, a good diagnosis and a timely reaction will allow companies to save the next potholes.
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