If you are reading the news, it seems like the world is turning upside down. Climate change, a geopolitical crisis, inflation across the globe, the collapse of the tech and crypto industries set up a lucrative terrain for anxiety and knowing but one thing about the future – it is going to be grim.
In the beginning of the year, economists tentatively asked, “Are we headed for a recession?” In Q4, there’s hardly any doubt left anymore – we are indeed in the middle of one. Also, it’s almost instantly obvious that this crisis is not like its 2008 predecessor. This time around, signals remain mixed, with layoffs and furious hiring coexisting on the same plane.
As a result, depending on the news you come across any given day, it’s easy to both think nothing is happening and believe things are a lot worse than is the case.
As we are nearing the end of Q4, it’s time to draw the line and make projections for what the economic outlook for 2023 will be like. In this post, we will make a few data-driven current economy predictions, exploring the effects of recession on organizations.
Assessing the scale of the crisis
Before determining the effects of recession, leaders should do their best to determine its objective scale. It’s no easy feat considering that regions don’t bear the economic burden to an equal extent. However, global survey data can give organizations a broad-stroke impression of the global economy, understand its key concerns, and the rate with which the economy takes a turn for the worse (or rebounds).
GDP variations help understand how central banks and governments are responding to the pressures of the current economic situation. We will examine them region by region to give leaders a solid understanding on how effects of recession vary geographically.
Throughout Q3, the US appears to be bouncing back from the shockwave it absorbed during the last two quarters. After having shrunk noticeably, the year-on-year GDP has finally expanded again, growing at a 1.8% rate.
In the Eurozone, the economic outlook is grimmer and is showing more signs of recession. In September, Eurocoin – the key indicator of the region’s economy hit a negative value of – 0.73 for the first time in two years.
The economic changes are not consistent across the region. While the Chinese economy has expanded by 3.9% over Q3, Japan’s annualized GDP shrank by 1.2%, as the yen was hitting historical lows.
In South Korea, year-on-year economic growth has accelerated by 3.1% but experts are forecasting a contraction by the end of Q4. In India, the annual GDP has increased by 2.6% in Q3 according to the data released by the Bureau of Economic Analysis.
Consumer concerns and pricing patterns
The patchwork of current economic issues generally stays consistent across the world, with slight regional variations.
For example, APAC and US-based McKinsey survey responses are most concerned by inflation, whereas Europeans are highly worried about energy volatility.
At the same time, China is still grappling with the consequences of the pandemic as part of the government’s zero-COVID course. Some of these strategies are causing a wave of uproar among the general public, leading to mass protests.
Another trend stays constant: global recession worries encourage consumers to trim expenses and consider saving strategies.
In the US, 43% of respondents surveyed by Deloitte last month are delaying large purchases, 47% are worried about not saving enough, and 42% believe their financial situation has worsened since last year.
In Europe, the signs of spending pessimism are stronger. 58% of the region’s consumers are worried about increasing prices. 43% of consumers surveyed are voicing doubts about the region’s ability to recover. Four in ten shoppers have cut back on nonfood items.
Over a third of surveyed Europeans had to bite into their savings to cover routine expenses like food, accommodation, transportation, and utilities.
Consumer behavior signals in the region are mixed: retail sales expanded in China, remained relatively flat in South Korea, and contracted in Japan.
Since the start of the year, central banks have been taking measures to reduce supply chain congestion.
The pressure created by the Federal Reserve is showing early signs of a supply-demand gap shrinking. Nevertheless, sea freight rates stay high in the US and Europe, but have dropped significantly in China.
10 effects of recession on workplaces
According to a McKinsey survey on Global Economic conditions for September 2022, organizations share a grim outlook on the state of the economy. Leaders are primarily worried about inflation, rising energy prices, and geopolitical instability.
In Europe, specifically, energy stays a number-one concern for business managers. In the US and some Asian markets (such as India), rising wages are troubling the business sector. One thing unites respondents across the globe: more expensive operations. Statistically, 9 in 10 organizations are spending more this year to keep their doors open.
To give leaders a clearer picture of the concrete effects of running a business during the 2023 recession, we zoomed in on each of the individual factors and assessed how they might impact organizations across a medium or long term.
1. Increasing operational costs
As mentioned above, organizations are bracing themselves for spending more for basic maintenance. The crisis felt most acutely across the following operation categories:
- Energy (office maintenance, fuel, etc.)
- Raw materials for manufacturing
- Rising transportation costs
- Rising wages
- Increased spend on supplies and equipment
According to McKinsey, the degree to which private sector actors are worried about the impact of the economic recession on individual sectors varies by region. As such, electricity is a top-of-the-mind concern for Europeans, while more expensive materials are a challenge for Chinese respondents.
Increasing wages stay the biggest concern for American organization leaders and trouble Indian managers.
2. Reduced customer spend amidst inflation fears
Data has repeatedly shown that customer acquisition is expensive: according to Shopify data, a small retail brand spends around $58 per customer.
CAC (customer acquisition cost) estimates value by industries – acquiring customers in higher education, finance, or healthcare is typically more expensive than is the case for retail or entertainment.
To reduce customer acquisition costs, companies focus on retention through marketing, sales, and customer service interactions. When the stability of a brand-customer relationship is threatened, financial losses are inevitable.
Unfortunately, the disruption of brand loyalty is a valid concern amidst a recession. Consumer sentiment surveys yield signals of people’s unwillingness to spend unless necessary.
74% of respondents say they spend less. Most of that trading down comes down to rethinking the pack size of typical purchases (60%), postponing non-essential shopping (44%), choosing stores that offer a lower price range or a “buy now, pay later” model.
A higher resistance to non-essential purchases among consumers means that convincing a prospect to commit to a deal will get harder, so customer acquisition costs will likely rise – a process already fueled by inflation.
Layoffs and hiring freezes
Layoffs are one of the most visible and discussed effects of recession in 2022.
From experts and tech journalists to job-seekers, we are overwhelmed by deep cuts at Meta, Twitter, and Stripe, hiring freeze and layoff fears at Amazon and hundreds of other companies, large and small.
TechCrunch has recently reported that layoffs are slowing down, referencing the data provided by layoffs.fyi – but that was before Twitter, Meta, Amazon, Asana, and Stripe all made lay-off announcements in a span of two weeks.
So far, it’s likely that the layoff trend persists in 2023. Yet, both companies and workforces should understand that important context is often left out of layoff announcements.
Here are the considerations leaders should keep in mind when assessing the impact of layoffs on the global economy of 2023.
- Layoffs are currently at 0.9% which is a historically low and overall normal value.
- Labor market stays tight due to talent shortage and the increasing age of the working population.
- By following high-profile layoff trends only, leaders create a distorted picture of reality since smaller market players are still actively hiring.
Hiring freezes are another signature trend of the next year’s job market. Between August and July, there was a 10% drop in job openings across the US – from 11 million to 10 million. A hiring freeze is proof that companies are taking a “wait-and-see” position and are cautious to make moves in either direction – hiring or firing.
4. Plummeting advertising and marketing spend
Early signals already make it clear that the recession will be hard on companies with advertising-based revenue models. That was part of the rationale behind the workforce restructuring at Twitter and Meta.
Statistically, marketing spending strongly correlates with GDP fluctuations. When a downturn is near, executives cut advertising spend and marketing team leaders struggle to hold on to their budgets. Is this approach sensible? Data shows it is not the best long-term growth strategy, considering that, under economic pressure, it’s crucial to invest in customer relationships and keep brand awareness high.
Also, team leaders should consider that, as the rest of their sector taps out of campaigning aggressively, average cost per click will drop, making campaigns more cost-effective.
5. Slowing down R&D and product rollouts
Historical data shows that, during a recession, companies usually curtail R&D.
A study of the impact of the 2008 financial crisis on European R&D shows that, among the effects of recession, there’s a contraction in R&D spending, growth rate, and R&D share in the organization’s total investment.
While recessions have different patterns, it’s safe to assume that some economy trends will persist – like the fact that companies with high reliance on external funding will be forced to be more selective about committing to new releases than those sustaining themselves internally.
6. Cutting down employee benefits
Aside from a massive wave of layoffs, at the time of writing, Twitter has also come under fire for cutting a free meal program the company’s employees have been enjoying. According to Elon Musk, the platform’s new owner, reported that these lunches cost the company $400 a year per person (after the claim was made, Tracy Hawkins, former VP of Work Transformation at Twitter, debunked it in a tweet).
Whether or not the financial data Musk provided is true, revisiting employee benefits and cutting expenses that are not strictly necessary for operations is a common theme this recession.
Meta cut employee perks back in March – its employees could no longer expect valet services and free meals were delayed.
Companies are also actively slashing employee benefits for retirees – in January, AT&T pushed back on its promise of lifetime insurance to the company’s retired staff.
Cutting employee benefits is a symptom of several broader emerging trends in the economy:
- Workers no longer hold the cards the way they used to
- Cost-efficiency becomes a key priority for most organizations and they are pressured to review their expense sheets to avoid the effects of recession.
- To some extent, cutting on-site perks is a reasonable consequence of widespread hybrid work adoption, as it levels the playing field for in-office and remote employees.
7. VC and government investment slows down
In 2008, VCs were among the pioneers in ringing the alarm about the upcoming recession. In October 2008, Sequoia Capital gave a presentation with a self-explanatory title “RIP Good Times”. In the talk, the fund encouraged its portfolio companies to be more diligent and strategic about their operational decisions.
A few months down the line, a massive slowdown in funding followed, and it wasn’t until 2011 that the market rebounded. According to Crunchbase data, Series A, B, and C investments dipped 40% during the period of economic contraction.
At the same time, slow but steady growth persisted in seed funding, which proves investors’ willingness to support new projects even as markets slow down and keep investing during a recession.
If we compare the historical data of 2008 and present-day numbers, common pattern of what happens in a recession? The slowdown appears in the chart this time around, as it did in 2008. According to Crunchbase, total funding for Q3 2022 amounted to $81 billion, $90 billion less than it used to be last year, marking a 53% reduction.
At the same time, black-swan events have a huge impact on investing decisions for 2023 and beyond. At the time of writing, VC funds are dealing with the reverberations of the collapse and bankruptcy of FTX – a major cryptocurrency exchange once valued at $32 billion.
Sequoia Capital backed the project with $210 million, major players, like SoftBank and TigerGlobal, had a stake in the project as well.
In its recent interview, Sequoia partner Doug Leone has already hinted that the story of FTX will become a cautionary tale for VC funds, who will have to be more selective about their portfolio projects and do better due diligence.
8. Global manufacturing slowdown
According to a report by the World Bank, in 2022, global manufacturing volume follows the trajectory of past recessions. If that is the case, one can expect an even sharper decline in industrial production, as the downturn hits its peak next year or later.
Experts also signal a slowdown of manufacturing – according to Pooja Sriram, a Barclays economist in New York, “The post-pandemic inventory restocking cycle is winding down amid softening consumer goods demand”. The trend has several root causes. For one, changes in customer behavior prompt manufacturers to reduce inventories.
At the same time, the shortage and rising prices on materials discourage manufacturers from increasing production outputs. Supply chain tensions also contribute to a crisis in manufacturing.
9. Supply-constrained supply chain market
In supply chain, the effects of recession will be influenced by an exceptionally low level of readiness among market leaders.
The last two years were highly tense for the market, hugely due to the demand boom fueled by the Fed lowering interest rates, as well as by transportation difficulties associated with the pandemic.
The current state of the market makes it highly vulnerable to risks. At the same time, while the previous supply chain crisis unfolded in a demand-driven market, today’s supply still cannot meet demand.
All things considered, supply chain is one of the few industries in which recession is an opportunity to regain equilibrium and optimize operations, as the pressure to deliver an endless chain of goods slows down.
However, operating amidst an economy recession unveils new challenges in management and strategy. Gartner predicts that, in 2023, markets will have to switch between demand-driven and supply-constrained approaches, which is a difficult balancing act for leaders.
10. Budget cuts for ESG efforts
Although climate concerns are growing by the day, along with the number of climate victims, companies are backing away from their ESG commitments.
According to Jane Lawrie, global head of corporate affairs at KPMG, “As CEOs take steps to insulate their businesses from an upcoming recession, ESG efforts are under increasing financial pressure”.
A report released by the company also stated that 60% of surveyed executives are either reviewing their sustainability efforts or putting them on hold.
At the same time, governments are increasing the amount of ESG scrutiny organizations have to comply with, making it harder to neglect climate efforts. European investors need to ensure compliance with the Sustainable Finance Disclosure Regulation.
In the US, the SEC urges companies to report on their sustainability impact. As a result, stakeholders put executives under pressure regarding ESG and push organizations to be mindful about the impact of their efforts on the environment and transparent in reporting.
The bottom line: what lies ahead
Overall, signals across all industries are consistent with a pre-precession state.
As the global economy finds itself cornered by climate change, political tensions, and the post-pandemic aftermath, both consumers and organizations choose to be more pragmatic and thoughtful about the ways they allocate resources.
At the same time, leaders need to find a balance between watchful waiting and growth to stay competitive and not miss out on opportunities. In Part Two of the series, coming out next week, we will explore the ways in which leaders can overcome the effects of recession and steer their organizations to success.
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