The biggest challenges facing the global economy
Economic Recession
- Many nations implemented recovery measures to reduce economic recession and many more like the UK, the US and China are using this as an opportunity to build back their economies better. The global economy had been experiencing a strong bounce back as a result of this.
- This is more uncertain with the looming recession brought about by inflation, rising energy prices and the war in Ukraine. A new round of Covid-19 will seriously undermine this fragile recovery process.
- We observe this taking place, for instance, in China, where growth is currently slowing. The government has chosen to re-impose tough, extensive limitations as a result of the recent viral epidemics that have plagued the nation. Additionally, the real estate crisis is hurting the economy as a whole, with several repercussions
Increasing Debt Burden
- A significant rise in the national debt is a second effect of the pandemic and the recovery strategies put in place. This presents a particular issue for developing nations since the pandemic’s economic effects have been somewhat tempered by the temporary suspension of debt payments for the poorest citizens. It is still uncertain what would happen if this precaution were completely removed.
- Governments are not the only entities left with enormous debts; the private sector e.g., commercial real estate businesses are also in this position. Also largely affected are businesses in the service sector, such as tourism, culture, and aviation. Companies are also being impacted by disruption to global supply networks, rising raw material costs, and high transportation costs. While families are being burdened with rising energy bills, cost of living expenses and increasing cost of commodities and services.
The Impact of Geopolitical Tension on the Economy
- Higher costs are correlated with commodity scarcity. The American Federal Reserve is tightening monetary policy in response to inflationary pressure. It has stated that a rate increase, the first since December 2018, is anticipated in March.
- Therefore, it could become more challenging for vulnerable organizations and nations to enter the credit market. The European Central Bank has similarly been rising interest rates and has done so for the first time in 11 years, as per the graph below
- The ongoing economic disputes between China and the USA over semiconductors are another source of tension in Asia, in addition to the military issues surrounding Taiwan.
- The United States has imposed restrictions on the sector, sometimes at the expense of its own technology and industries in an effort to halt Chinese technological advancement.
- Another difficulty for the world economy is inflation, which has partly been brought on by persistent supply chain issues and growing demand as a result of the economic recovery in the post-Covid era.
“Geopolitical tensions represent additional significant concerns. The first instance that comes to mind is the conflict between Russia and Ukraine. The fighting as well as the sanctions imposed have had negative impact on the area, as well as on Europe and the global economy. The effect of the pandemic and war has undoubtedly contributed to the impeding recession.”
Ways to Minimise Supply Chain Disruptions
- Businesses that had not permanently ceased operations were questioned in August 2022 about disruptions to their global supply chain.
- Nearly one in five (18%) of businesses with 10 or more employees that had not permanently ceased operations reported disruptions to their supply chain.
- This was at the end of September 2022 and since the question was first asked in December 2021, this is the lowest percentage that has been reported.
- The construction industry reported the biggest drop in businesses declaring that there had been a disruption and 12% reported an 8-point decline from July 2022.
- The main impact was 33% of organizations with 10 or more employees, who said they were suffering global supply chain disruptions and a shortage of materials
“The pandemic has had a transformative effect in significantly shaping the global economy. After the pandemic many countries and businesses saw this as an opportunity to rebuild better. Today many countries and businesses continue to face significant economic challenges. Market volatility, energy prices and Ukraine war have created further challenges”
Main Challenges for Most Businesses
- From the Business Insights and Conditions Survey (BICS) for the period 20 September to 2 October 2022 reported in this section rising energy prices were most concerning.
- Businesses that had not permanently ceased operations were questioned about their top business concerns as they looked ahead to October 2022.
- In October 2022, more than two-thirds of businesses (70%) said they were concerned, and this number rose to 83% for companies with 10 or more employees.
- 90% of all organizations of all sizes reported some level of concern in the hospitality, lodging and food service activities sector.
- The majority of survey results were submitted before the 23rd of September 2022 financial statement, and the chancellor’s budget statement on 17 November 2022
What is Financial Resilience?
- Business resilience is the capacity of a company to quickly adjust to changes in the environment while continuing ongoing operations, protecting people, assets, and the overall value of its brand.
- Business resilience goes beyond disaster recovery (DR) and business continuity by providing post-disaster methods to reduce vulnerabilities, prevent expensive downtime, and keep operations running in the face of additional, unforeseen breaches.
- Business resilience, operational resilience, cyber resilience, and supply chain resilience are a few examples of the diverse components of business resilience. The term’s spread demonstrates how significant resilience has grown to be for governments, businesses, and several organisations.
- Once activities have resumed, it is simple to declare that a company has recovered from an incident, but that does not imply that it has a robust resilient strategy in place.
- A business must ultimately decide on what its ideal state should be after an incident. It must decide what defines a resilient state for it as a business to accomplish this successfully.
“Businesses that are resilient do not wait for disasters but actively plan ahead with contingency, strategic and financial plans. As a result of this they are better equipped to identify, manage, and mitigate current and emerging risk. They can leverage opportunities for sustainable value.”
What is a Resilient Finance Plan?
Resilience Finance Plan
Anticipating disruption is fundamental to resilience, however, to prepare for a disruptive occurrence, a business must be forward-thinking. This is where a business resilience plan can help. In short, it outlines the necessary steps a business must take to mitigate and survive a crisis.
Steps for Building a financial resilient business plan
- Mitigate weaknesses in the current business operating model ahead of any event
- Define how the business foresees the likelihood/impact of risks and actively mitigates these
- Develop an alternative target operating model, strategic business and financial plan
- Determine how the vision, culture and people strategy can propel business recovery.
The benefits of Financial Resilience planning
- Resilient business plans enable businesses to identify mitigate and respond to risks quickly and effectively.
- Resilience business plans allow businesses to withstand unexpected shops and rebound from disruption.
- Resilience enables businesses to thrive because of their ability to pivot and adapt to new business models.
The 3 Phases of a Business Continuity Plan
- Survive: The businesses that have been most severely impacted by the recession are doing whatever it takes to keep the lights on and simply continue to operate. These businesses are suffering from a major decline in sales, notable employee, and expense cutbacks, or possibly a significant loss of business that is endangering their survival.
- Recover: Businesses in this phase are responding to financial changes by using existing systems or implementing new strategies to deal with the unexpected. At this point, businesses can start to use their resilience to mend and restore what went wrong during the initial loss of business.
- Thrive: Businesses that are in the thrive phase are getting ready for opportunity and growth. They are currently integrating components that will advance their company and help it become more resilient to the new business environment.
“Only 57% of businesses feel ready to deal with the unexpected, widespread disruption of regular business operations despite its significance. Resilience is critical for the future of any business because it is essential for sustainable growth and survival of the business for the long-term.”
How do you Build Financial Resilience in Practice?
- Businesses have now developed methods to address the consequences of the COVID-19 issues, but the need for continued resilience still must be strengthened.
- Businesses must prepare for both the primary impact of future disruptions as well as their secondary and tertiary impacts.
- Future disruptions may be different. The impact may take a while to manifest, but can rapidly pick speed and the knock-on effects can build gradually until an emergency tipping point.
- Few businesses have developed strategic resilience for a variety of reasons. The ambition of building a resilient business can occasionally conflict with the more immediate goal of profits.
- Managing the risk of excessiveness can promote resilience in supply chains, but it also raises costs and lowers returns on investment, which makes building resilience difficult to sell to businesses.
- Resilience can only be achieved through strategic business planning and isolated resilience initiatives are unable to work together to accomplish a sustainable solution.
“In a challenging global economy, with rising inflation, interest rate and energy prices, businesses need strategies for cost and financial risk and resilience. Implementing strategies for business resilience is mission-critical to businesses and essential for long-term growth.”
Steps for Building Long-Term Resilience
Business leaders can apply the following steps and best practices to build strategic resilience.
- Obtain management buy-in into strategies to improve risk and resilience
- Start tracking resilience KPIs and reporting them internally.
- Lessen your reliance on extrapolations derived from budgeting and planning.
- Determine the business’s inherent strengths, and weaknesses. opportunities and threats
- Develop first-line resilience skills, and strong team and operational resilience.
- Establish a mechanism for early identification and mitigation of current and emerging risks
- Proactively tracking current and internal and external hazards.
- Integrate risk at an enterprise level, into all aspects of the business
- Discuss resilience in terms that stakeholders and investors understand
- Establish an early-warning system
- Embed resilience within first-line teams
The Impact of Geopolitical Tension on the Economy
“For many businesses financial difficulties from the economic slowdown are likely to continue. As evidenced by indicators such as the rising energy prices, increased inflation and market volatility, so businesses must remain cautious without stifling innovation.”
From the Business Insights and Conditions Survey (BICS) for the period 20 September to 2 October 2022 reported in this section rising energy prices were most concerning.
The European Central Bank has similarly been increasing interest rates and has done so for the first time in 11 years, as shown above.
The main impact on firms, indicated by 33% of companies with 10 or more employees, who said they were suffering global supply chain disruption, was a shortage of materials.
Why Financial Resilience is Fundamental?
- Fiscal resilience: Businesses frequently lose sight of long-term fiscal risk in favour of short-term commercial gains. The key to minimising income, cost, or credit fluctuations is striking a balance between strong capital and liquidity.
- Technology resilience: The ability to invest in a safe, adaptable digital software technology stack. Companies using high-quality data for strategic and operational decisions compete better, and deliver projects safely, on time, and within budget.
- Organisational Resilience: Employee recruitment, retention, and satisfaction are crucial components of mastering business resilience.
- Operational resilience: Without alternative plans in place, supply chain disruptions can erode productivity and cause business operations to fall apart. Resilient firms need to add redundant operations to their supply chain risks to adapt to rapid supply and demand changes.
- Business model resilience. Traditional business models became redundant when the pandemic forced businesses to move to remote working. Therefore, it enables companies to adapt where necessary and ensures business continuity in times of uncertainty.
“Implementing resilient strategies is much easier stated than done. This is especially true when businesses lack the adequate expertise in risk and resilient strategies. Or sufficient liquidity to invest in the right technology to compete effectively.”
Frequently Asked Open Book Questions (FAQs)
“Questions are often asked about financial resilience. For example, why do we need to invest in business resilience now when the priority is managing costs and maximising profit.What are the risks of inaction with regards to sustainability? When will we obtain our return on investment if we invest in a more resilient strategy?”
How do you achieve resilient growth throughout the business cycle?
To build resilience, companies must focus on developing a healthy and balanced portfolio and strategy.
What is business resilience risk?
Business resilience is the ability to respond immediately to risks and new opportunities. Additionally, it maintains essential business activities and protects employees, assets and the reputation of the business.
What are the four components that comprise business resiliency?
These include 1. Risk assessment and business impact analysis 2. Risk mitigation plan development 3. Testing and analysis; and 4. Risk monitoring and program sustainability.
What are the most critical issues facing global businesses?
Rising energy prices market volatility and inflation rate increases.
Why do you think it is important to aim for a global market?
Entering international markets enables companies to expand to new markets and reach a wider customer base
How would you improve and adopt global business resilience?
Decide on your target markets, and assess the risks and feasibility of the revenue sources.
How do small businesses contribute to the global economy?
Small businesses also contribute to global economic growth by providing 66% of global employment opportunities.
How can CFBL Consulting help?
- Undertaking pre-audit diagnostic and current state risk assessment
- Perform Independent actual carbon cost audits to prevent greenwashing
- Engaging with key stakeholders, board, and leadership for buy-in
- Communicating with stakeholders and the supply chain early on
- Establishing protocols for your net zero strategy
- Implementing protocols through workshops and training
- Benchmarking your carbon footprint for carbon reduction and offset
- Developing the investment business cases, for decarbonisation
- Establishing a sustainable, ESG, and Net Zero strategy
- Independently reporting actual impact against goals
- Account, tax, and compliance reporting for ESG and carbon cost
References
- https://www.ons.gov.uk/businessindustryandtrade/business/businessservices/bulletins/businessinsightsandimpactontheukeconomy/6october2022
- https://credendo.com/en/knowledge-hub/four-challenges-global-economy-2022
- https://www.forbes.com/sites/forbescommunicationscouncil/2022/08/23/three-ways-businesses-can-prepare-for-challenging-economic-times/?sh=40eee3ec16ca
- https://hbr.org/2020/07/a-guide-to-building-a-more-resilient-business
- https://www.techtarget.com/searchcio/definition/business-resilience#:~:text=Business%20resilience%20is%20the%20ability,assets%20and%20overall%20brand%20equity.
- https://www.mckinsey.com/capabilities/risk-and-resilience/our-insights/from-risk-management-to-strategic-resilience
- https://www.dataminr.com/resources/a-comprehensive-guide-to-business-resilience
- https://credendo.com/en/knowledge-hub/four-challenges-global-economy-2022
- https://www.aberdeen.com/blog-posts/blog-ecm-3-phases-business-resilience/
- https://www.forbes.com/sites/forbesbusinesscouncil/2021/05/17/13-critical-steps-to-building-a-business-resilience-plan/?sh=6aa3a5212fb7
- https://www.cnbc.com/2022/07/21/european-central-bank-raises-rates-by-50-basis-points-its-first-hike-in-11-years.html
- https://graphics.reuters.com/
- https://www.forbes.com/sites/sap/2020/09/25/the-key-to-resilience-and-sustainability-interconnected-industries/?sh=33f06be320f3
- https://thebusinesssniper.com/6-top-key-success-factors-for-any-business/
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