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New Economic Reality: Implications and Strategies for Businesses

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The extraordinary global disruptions over the last few years have led to the rise of a new economic reality that is shaping today’s consumption and business outcomes. The global economy is entering a period of slower growth and high inflation, while energy pressures, rising cost of capital, tight labour market, geopolitical risks and a reset of globalisation are adding challenges and uncertainties. Understanding the major shifts in the global economic environment will help businesses to navigate uncertain times with proactive strategies to enhance resiliency and drive growth.New Economic Reality Chart 1.svg

Slower growth and high inflation undermine consumption and threaten business outcomes

Slower economic growth and elevated inflation are likely the key features of the global short- and medium-term economic outlook. In 2023, the global economy is forecast to grow at 2.5% in real terms, among the lowest rates since 1993, except for the recession years of 2009 and 2020. Inflation is expected to moderate to 6.9%, but remain far higher than the historic trend (4.1% on average during 2010-2020).

To navigate a world where demand will fluctuate more than in the past, companies should focus on optimising pricing strategies, reshuffling product portfolios, and managing costs

Source: Euromonitor International

As consumers become more cautious in their overall spending, while production costs, from raw materials, energy to labour, remain high, it will be challenging for businesses to retain their profit margins and find growth areas. Pricing, portfolio and cost management will be key for businesses to navigate an economic downturn. Consumer goods company Unilever announced in early 2023 it would cut back its product lines to focus on top-selling portfolios in an attempt to reduce costs and make its supply chain more efficient.

Rising energy pressures require energy-efficient solutions and proactive plans

The recent energy market turmoil has emphasised the importance of accelerating the global green transition, as well as adjusting policies and company strategies to shield business activities and consumers from potential future shocks. For example, investing in renewables and adopting energy-efficient solutions would help business mitigate energy shocks and cut costs. According to Euromonitor International’s Voice of the Industry: Sustainability 2023 survey, 55% of companies which responded plan to invest in improving energy efficiency. In addition, companies should offer more energy-efficient and affordable products and services to resonate with consumers’ growing concerns regarding not only energy costs but also sustainability.

Rising interest rates add to the cost of doing business

In an attempt to tame high inflation, large economies have tightened their monetary policies since 2022, putting an end to more than a decade of low interest rates. The higher and more volatile cost of capital will impact both businesses and consumers, with capital-intensive sectors such as construction, business services, and manufacturing being hit the most. However, companies with cash reserves and low debt could benefit from increased returns coming from higher interest rates.New Economic Reality Chart 2.svg

Analysis of market conditions, and the review of supply chains and operating costs can help companies to free up cash and reduce capital spending. Chip manufacturer Intel, for example, announced strict cost-cutting measures early in 2023, including lower quarterly dividends and wage reductions, in an effort to preserve cash as Intel faces rising capital expenditure.

Geopolitical uncertainty and a reset of globalisation prompt de-risking strategies

Globalisation - the free flow of ideas, people, goods, services and capital across borders - has come under severe pressure due to the disruptions from the COVID-19 pandemic, the war in Ukraine and increasing US-China tensions. These events have accelerated a long-term structural shift in the global trade and global economy, characterised by multipolarity, economic fragmentation and rising geopolitical risks.New Economic Reality Chart 3.svg

Against this backdrop, companies will increasingly try to make themselves more resilient to external shocks while still seeking growth in international markets. Rather than de-globalisation, this de-risking of global supply chains will lead to a shift in the nature of globalisation; a globalisation reset. Various measures have been used to de-risk supply chains, such as onshoring, friend-shoring and nearshoring. Through diversification, trade will be simply diverted rather than diminished, creating opportunities for suppliers in low-risk emerging markets in the process, with India, Mexico and Vietnam particularly standing out recently.

Both short-term and long-term strategies needed as the labour market is shifting

Demographic changes and global disruptions have contributed to a rise in labour shortages, skills mismatch and shifts in worker preferences. In 2022, for example, the number of job vacancies in the US rose by 12% over 2021, as many businesses struggled to find workers amid a tight labour market. These labour market trends are directly impacting companies’ operations, productivity and costs.

Retain and attract talents while enhancing productivity are crucial for business to navigate the challenging labour market

Source: Euromonitor International

Businesses will need to develop both short- and long-term strategies on how to best navigate the challenging labour market. In the short run, employee retention schemes will help as competition for staff grows. However, in the long run, more drastic measures such as robotisation and automation may need to be implemented as the demographic situation worsens. Investment in training, research and development and/or strategic mergers and acquisitions (M&A) can help to boost productivity and grow.

For further analysis, read Euromonitor International’s full report, New Economic Reality: Transforming Uncertainty into Opportunity.



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