From pandemic-induced supply chain disruptions to the abrupt end of a prolonged period of low interest rates, there is impeding economic uncertainty. This economic uncertainty has led to operational challenges and increased risk for some businesses. Although businesses and the economy have continued to demonstrate resilience, various financial trends may give rise to more challenges and recession fears.
In general, economic uncertainty has been felt by all globally. All regions have been feeling the pressure of higher interest rates and inflation. Despite slow growth and elevated risks, some recovery is underway and global inflation is expected to fall further in 2024, though it will likely continue to linger above pre-pandemic levels.
Global inflation is trending down and seems likely to head even lower in the second half of 2023. Generally, price pressures from food, freight and energy around the world have eased. Labor markets remain tight, but underlying wage and inflation pressures have shown some signs of easing.
While certain economic conditions are trending in a positive direction for businesses, other factors will influence the business landscape in the coming months.
Trends in the Business Environment
Country-specific conditions have put various industries at greater risk. This is demonstrated by the failures of several midsized banks in the U.S. As interest rates and inflation remain a major headache for U.S. businesses, financial institutions should examine borrowing patterns to identify challenges and opportunities to suppress recession fears and supply chain disruptions.
U.S. consumer spending remains supported by a tight labor market, although high prices and increases in interest rates are causing consumers to be more selective.
As small business health weakens, borrowing patterns of U.S. businesses are affected.
Considerations and Recommendations for economic uncertainty
There is a general trend toward near-term improvements, though some industries will experience more stress than others. The global economy continues to face unique macroeconomic conditions and, in addition to the ongoing tightness in the labor market, there are now a few more signs of underlying vitality. Although the impact of the tightening monetary policy is not yet apparent, this might be a signal that businesses are experiencing some relief as the core measures of inflation begin to cool.
While inflation may continue to decrease in the second half of 2023, the U.S. economy will continue to experience turbulence for the foreseeable future. All three drivers of the economy—business, consumer and government—are facing headwinds that stand in the way of growth. The federal funds rate remains higher than it has been since 2007. Borrowing is more expensive now, which may be why the gross private domestic investment component of GDP declined by 12.5% in the first quarter of 2023. These trends will likely persist as credit conditions continue to tighten following the banking crisis.
Global markets uncertainties
With increasing constraints driven by the cash-flow squeeze, lower availability of capital and higher input prices, there will likely be an increase in forms of fraud like business identity theft and business misrepresentation, in which businesses make false statements that affect decisions regarding contracts or transactions. Indeed, in comparing Q1 2023 to Q1 2022, Dun & Bradstreet saw a 33% increase in business misrepresentation fraud in the United States, the United Kingdom, Canada and Ireland. In the United States alone, business misrepresentation increased 19%.
The U.S. economy seems to be headed toward a volatile period where economic growth remains lackluster, depending on how various risks are mitigated in the coming quarters. In the second half of 2023, companies should therefore be taking a hard look at how to navigate this challenging economic climate. Companies must look beyond short-term considerations and focus on long-term planning. The following best practices for treasury, finance and risk management leaders may help organizations navigate the short- and long-term uncertainty associated with this dynamic landscape:
Economic trends and uncertainty
Understand your company’s starting point and its ecosystem. Take a holistic view of the business to evaluate its financial health, and the health of its vendors and suppliers. Be sure to understand the investment strategies and financial or operational risks. Further, make sure to understand your organization’s obligations and connections to customers, prospects and suppliers so that you can quickly scale back or change operations as needed in the face of further disruptions.
Be prepared
Proactively identify risks and develop mitigation strategies and alternate plans. For example, consider whether your operations are stable enough to take on new engagements or initiatives. Without clarity and preparation, it is easier to miss opportunities and not see increased business risk.
Maintain focus
During periods of economic uncertainty, it becomes more important than ever to keep informed about the potential impact on your business from unexpected events, shifts in regulatory requirements, changes to corporate policies or disruptive technologies. Continuously monitoring internal operations and external events will yield valuable insights. For businesses, this means staying focused on a long-term strategic plan.
Remain agile
Nimbleness and openness to change can be corporate leaders’ biggest assets as they create a resilient, agile business. For example, an unexpected event such as a port closure may also present opportunities to pivot your supply chain operations. If your primary suppliers are impacted by this type of unexpected event, consider using an alternative supplier in an unaffected region of the world.
By staying aware of risks and taking a proactive stance to recognize and mitigate them early, businesses can put themselves on the best possible footing to survive whatever may come. As challenges continue to mount, it is vital to strengthen your resources, properly manage your company’s risk profile and plan for long-term success.
