Business prospects are inextricably tied to local, national, and global economies. Nevertheless, macrotrends do not necessarily determine how well a business performs. Business leaders planning strategies for the weeks, months, and years ahead must take numerous factors into account. Those considerations include: Where is the business is located? What business sector does it operate in? Who are its customers? What are the local economic prospects? Is climate change affecting operating conditions? Are there supply chain pain points to overcome? What are the prospects for the world economy in 2023? Many economists are predicting continued inflation and recession, although there is a glimmer of hope that a deep recession can be avoided. As 2022 came to an end, journalists Paul Hannon and Sarah Chaney Cambon reported, “The global economy continued to deteriorate as 2022 draws to a close, but not as severely as economists previously feared, raising the possibility the world could avoid a deep slump next year.”[1]
Will Efforts to Fight Inflation Result in Global Recession?
According to Adam Tooze, an economic historian and director of the European Institute at Columbia University, “We now find ourselves in the midst of the most comprehensive tightening of monetary policy the world has seen.”[2] He acknowledges that interest rates have increased faster during previous belt-tightening efforts; however, he insists, “today’s [efforts] involve far more central banks.” He goes on to note, “The era of globalization since the 1990s has been one of disinflation and monetary expansion by central banks. Now that balance is being reversed, and on a global scale. … The consequences of this global deflationary cycle are hard to predict. We have never done this before on this scale. Will it get inflation down? Very likely. But we are also courting the risk of a global recession that at its worst could bring down housing markets, bankrupt businesses and states, and throw hundreds of millions of people worldwide into unemployment and distress.”
If that worst-case scenario unfolds, the consequences for businesses could be devastating. Journalist John Letzing notes that, in the past, economic discontent has triggered widespread unrest. And, he adds, there are signs current economic discontent could be stirring new unrest. “According to the World Economic Forum’s latest Chief Economists Outlook,” he writes, “economic discontent has been fueling ‘febrile political dynamics’ — and the difficulty people continue to have when it comes to buying bare essentials is ramping up the risk of social unrest. … A recently-published index found that more than half of 198 countries surveyed were at increased risk of civil unrest tied to the cost of basic necessities.”[3] Business leaders know that economic discontent and civil unrest are a toxic mix for business.
According to Letzing, “The good news is that ‘the gravity of the current moment is not lost on political leaders,’ according to the outlook. Many have sought to shield people from the worst impacts of rising costs.” The best scenario is that world economy experiences a soft landing rather than an economic crash. Such an outcome might prove tricky given Russia’s continued invasion of Ukraine, which is significantly changing energy supply chains, and China’s hardline politics, which could stifle its economic growth.
The Way Ahead
Many experts believe we stand on the cusp of a new economic era. Journalist Mark John observes, “Labor market shifts as baby boomers retire; disruption caused by extreme weather; the cost of climate action; more volatile geopolitics and an uncertain future for world trade: these are the larger trends some policymakers believe could make for a durably more expensive world.”[4] At an event in Brussels last fall, International Monetary Fund Managing Director Kristalina Georgieva told participants, “There is huge uncertainty as to how the economy will shape up now that the tectonic plates are shifting. … There will be pain.”[5]
Georgieva is not the only analyst who believes that economic “tectonic plates” are shifting. McKinsey & Company analysts, Chris Bradley, Jeongmin Seong, Sven Smit, and Jonathan Woetzel, assert, “Current economic and political turbulence could presage the start of a new era that is structurally very different with a new narrative of progress. … What we are seeing is surely more than the progression of just another business cycle. The unnerving combination of a global pandemic compounded by energy scarcity, rapid inflation, and geopolitical tensions boiling over has people wondering what certainties are left. Today’s events might even feel like a cluster of earthquakes that is reshaping our world. We have been here before.”[6]
Drawing on past eras, during which economic tectonic plates shifted, McKinsey analysts developed a framework they believe will help policymakers cope with today’s tremors. They write, “A new paper from the McKinsey Global Institute suggests a framework to imagine the new era, drawn from a historical perspective of the structural tectonics that underpinned the world we have today and how they might play out in the next era.” The McKinsey framework encompasses five areas: World order; technology platforms; demographic forces; resource and energy systems; and capitalization. Rather than predict what will occur in each of these areas, they pose a series of questions.
World Order. What might a new multipolarity system look like? Will the economy remain global in nature? Will we find new workable mechanisms to cooperate beyond the economy? How effectively will global and local institutions and leadership adapt to, and shape, this different world order?
Technology Platforms. Will a post-digital world emerge characterized by transversal technologies (such as, artificial intelligence (AI) and bioengineering)? What impact will the next wave of technologies have on work and social order? How will technology, institutions, and geopolitics interact?
Demographic Forces. How will countries, institutions, and individuals adapt to demographic changes — will we age “gracefully”? How will capital and institutions respond to inequality? What effect will climate migration have on global demographics?
Resource and Energy Systems. How will the world navigate an affordable, resilient, and feasible path to climate stability? What dynamics will play out between those who have critical resources and those who do not?
Capitalization. Will we find the next productivity engine to drive growth? Will the rise and rise of the global balance sheet be reversed?
Bradley and his colleagues conclude, “If we are indeed in the early throes of a seismic shift — as the evidence appears to suggest — leaders must both prepare for the possibility of a new era and position themselves to shape it.” That advice is aimed at both business and government leaders. There is little doubt the world is changing and wise leaders will begin planning now for how to adapt to these changes. As the questions posed by Bradley and his colleagues make abundantly clear, the future is uncertain. There are a lot of questions needing to be answered. One way business leaders can help plan for the future is by leveraging scenario planning. Cognitive technology platforms, like the Enterra Global Insights and Decision Superiority System™ (EGIDS™), can help business leaders analyze myriad scenarios at computer speed to help them select optimal strategies for confronting a volatile world. Only by examining questions, like those posed by McKinsey analysts, and exploring various scenarios can leaders make informed strategic decisions.
Footnotes
[1] Paul Hannon and Sarah Chaney Cambon, “Global Economy Slows, but Seems to Be Faring Better Than Feared,” The Wall Street Journal, 23 November 2022.
[2] Adam Tooze, “The First Global Deflation Has Begun, and It’s Unclear Just How Painful It Will Be,” The New York Times, 4 October 2022.
[3] John Letzing, “What’s new is old: how economic discontent triggered unrest in the past,” World Economic Forum, 30 September 2022.
[4] Mark John, “Analysis: This might hurt: tectonic plates of global economy shift,” Reuters, 12 September 2022.
[5] Ibid.
[6] Chris Bradley, Jeongmin Seong, Sven Smit, and Jonathan Woetzel, “On the cusp of a new era?” McKinsey & Company, 20 October 2022.
