Finding the upside in down

Signs of an economic downturn are increasing.

Equity markets have had their worst six months since the financial crisis. The S&P 500 has fallen 20%, and the NASDAQ is down 30%. Bond yields have widened, and the financing markets have become significantly more constrained.

Commodity and transport prices, which had heralded inflationary spikes and an overheating economy last year, are now at 52-week lows, suggesting shrinking demand and a probable economic slowdown.

In our 17th annual survey of the world’s leading restructuring experts – those professionals most experienced in responding to the downside of economic volatility – 87% expect a recession in the next 12 months, with 1 in 4 expecting it before the end of the calendar year.

Longer-term constraints to growth

We all hope that the impending downturn will be short and mild, but even after the eventual recovery, there are many reasons that future economic growth may lag that of the past decade. Aging populations and shrinking workforces in much of the developed world and China are one set of factors likely to constrain growth longer term. We are also unlikely to return to a world of zero interest rates and quantitative expansion, which helped propel growth after the financial crisis and through the pandemic. Increasing friction in international trade, finance, and data will also impede future growth.

The Chinese economy, in particular, will be essential to watch. Over the past 20 years, China drove 40% of global economic growth, with the US and Europe combined contributing about 20%. If China enters a period of slower growth, this will prove a significant constraint on the global economy.

Protect against the downside

In the short-term, you must take proactive steps to actively manage your business in preparation for any potential recession.  

Some no-regret moves:

• Cash flows are a leading indicator of market shifts and business health. Build cash reserves to ensure resilience through market volatility.
• Renegotiate supplier pricing. Input prices are falling across most categories. Make sure you’re paying true market costs. Don’t be a price taker.
• Spend time running scenario analyses. What would a recession due to your business? What actions should you be taking?
• Categorize business levers that you would pull in a downturn: 1) easy to reverse; 2) hard to reverse; and 3) mission critical. In the event of a recession, pull the levers in reverse order to the potential damage each will do to the business.

Prepare for the upside

The future of any company is in revenue generation and growth. Driving these results in a slowing economic environment is, of course, a significant challenge. But the rapid pace of disruptive change – particularly the acceleration in new technologies, business models, and consumer behaviors – requires agility and the continued investment into those areas that will lead to the future growth of your company.

Here are four areas to focus on:

1. Consider strategic options

Downturns create a buyer’s market. What are the market changing moves you would make to reshape your market, if you could? By planning ahead, you will be faster to act when opportunities come available. 

Do you have business areas that are underperforming, have less long-term potential, or are otherwise a distraction? Maintaining focus and divesting your company of non-core businesses is key to driving growth into the future. Private equity is sitting on over $1 trillion of dry powder, and while the environment may be challenging over the next few months, their appetite to deploy this capital will lead to a resumption in deal activity.

2. Accelerate your digital metabolism

Digital capability will soon – if it doesn’t already – underpin every successful company everywhere. Digital must become part of your company’s metabolism. It’s the lifeblood of the organization, and everyone’s responsibility.

But as with any investment, you must ensure you’re getting a positive return on your digital dollars. Focus on the business problem. It should be manageable, measurable, and scalable. Start small, experiment, and then move quickly to scale when successful.

3. Remain customer-centric

Continue to invest in your customers and put them at the center of your strategy. Use the data you have on them well. Have the right operating models, metrics, and processes in place to connect with your customer across all touchpoints—while minimizing increases in customer acquisition and fulfillment costs. For retail consumers, this may mean optimizing your omnichannel experience and services. For B2B, this may mean investing in customer success models of customer service. But in all cases, losing focus on your customers in a period of economic downturn is a sure-fired recipe for disaster.

4. Create the workforce of tomorrow

And invest in your people. Labor markets will remain tight, and the battle for the best talent will continue.

Begin to build the workforce you need versus the one that you have. Be creative. Source diverse capabilities from atypical places and train for the skills you need. Many jobs that need to be done aren’t jobs that have ever been done before, so you can’t always expect to find experienced workers to fill the roles.

Your workforce is your biggest asset. Investing in making it thrive will help create the energy you need to thrive and grow in this challenging environment.

Be biased toward action

Leaning into disruption and continuing to make investments into the future of your business—despite a slowing economic environment--will not be easy. But failure to do so may lead to long-term decline or loss of control over your future.

How severe the current downturn will be, I cannot predict. What we as business leaders can do is prepare as best we can by protecting against the downside today but also investing for the future that we know is on the other side.