Business in Volatile Times

A few recommendations to companies preparing for the Downturn

The next recession may not look like the last one but looking at all major economic crises over the last five decades and at what economists said about them, as Monitor Deloitte did, may bring some valuable insights:

• Four types of root causes explain most, if not all, crises: unsustainable central bank and economic policies, political turmoil, rising bubbles exacerbated by harmful practices, and unpredictable hazards such as epidemics or natural disasters.
• One element makes severe recessions different from minor slowdowns: Several potential fires, ready to ignite at the same time, are triggered by one.

Now let’s look at the current environment using the simple cause categories that we’ve just described. Among other things:

• European Central Bank /Federal Reserve interest rates may not remain low forever, without even entering into the debate of the long-term side effects of the low interest rate and quantitative easing policies of the recent years.
• Political turmoil is almost everywhere, from the escalating tensions in the Middle East (imagine for a moment the potential impact of a blockade of the Strait of Hormuz) to the increasing risk of a “Hard Brexit” while trade disputes and protectionism are mounting, particularly between the United States of America and the People’s Republic of China.
• Private debt and real estate prices have increased sharply both in China and in OECD countries (especially in France).
• 2017 (350B$) and 2018 (160B$) losses due to natural catastrophes were significantly above the last 30-year average (140B$).

We do not pretend here to predict what the next downturn may look like and when it may happen; indeed, most economists refuse to take this risk. However, using the phrase “Darkening Skies”, as the World Bank did in January of this year, might be appropriate.

Source: Deloitte, 2019 Global Cost Survey, April 2019 / Deloitte, 2019 European Cost Survey, September 2019 

Given that we know that a recession – or at least a downturn – is likely, the question is how companies should prepare. Deloitte’s 2019 Global Cost Survey (1,200 senior company executives surveyed globally) gives some insight on what companies plan to do: 71% of them plan to launch cost reduction programs within the next two years.

Is it the right thing to do?

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