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Are We Headed to a Recession? A Look at the Warning Signs

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American business is increasingly global; thus subject to greater global economic impact whether or not a given business is involved in international commerce.
 

The extreme disparity among developed and emerging markets and the many economies included inherently increases volatility. 

Political turmoil, acts of terrorism along with several significant humanitarian crises create further global economic instability.

And, governments, expected to stabilize economies during difficult times have instead contributed to declining economic conditions. Faulty spending priorities, excessive austerity, and failing to act in a timely manner are pushing business leaders and investors away.

Key Global Factors and Indicators
 

Given the large number of issues capable of triggering substantial worldwide impact, identifying and quantifying a huge number of risk factors can be overwhelming.

However, several factors span countries and continents. Examples include:

  1. Geopolitical uncertainty
  2. Exchange rate volatility
  3. Global economy instability
  4. Key industry volatility (e.g. energy)
  5. Central banks’ failure to drive positive economic impacts
  6. Zero inflation – with deflation fears
  7. Governments unwilling or unable to stimulate growth
  8. Global competition
  9. Weak productivity growth
  10. China – Blunders in financial markets drove massive ‘capital flight’ ($159 billion in December 2015), swiftly increasing debt, ongoing lack of transparency leading to distrust of China’s reported growth and financial stability
     

International Monetary Fund (IMF)
 

IMF Managing Director, Christine Lagarde’s February speech to the “Group of 20” (G-20) (1) requested “coordinated effort…to ramp up spending and accelerate delivery of long-promised economic overhauls.”

IMF leadership has repeatedly warned that although the global economy is still growing, we’re at a critical juncture; risk of ‘derailment’ is high.

European Central Bank – E.C.B. (2)

The E.C.B. has boldly entered uncharted territory. Examples:

  • Paying commercial banks to borrow money from them. If banks agree to lend these funds to consumers and businesses their interest rate over a four-year loan is negative.
  • Lowered their deposit rate (commercial banks’ interest rate) to -4% from -3% to persuade banks to lend rather than hold cash
  • Increasing purchases of government and corporate bonds to pump money into economies
     

The E.C. B’s December 2015 forecast for 2016 inflation was 1.5%; it’s now .1%. For over a year 19 Eurozone countries’ inflation has been at or below zero.

Substantial Economic Difficulties Don’t Mean a Recession is Imminent
 

Leading global economies are in a major slowdown. What’s unknown is whether another recession is looming. Economic predictions are notoriously wrong. The Economist’s January 2016 issue (3) reviewed their analysis of IMF forecasts from 1999 to 2014. An economy grew one year, then shrunk the next in 220 instances. Throughout this period IMF forecasts NEVER predicted the coming economic contraction in the following year.

United States
 

The U.S. appears to be in better shape than most countries. Even so, there is enough uncertainty to temper business’ appetite for investing in their businesses.

Business leaders’ optimism for the 2016 economy has fallen to its lowest level in three years per the Q1 American Institute of CPA’s “Economic Outlook Survey.” (4)

Only 28% of top-level execs were “optimistic” or “very optimistic” about 2016 U.S. economy’s prospects – down 17 points from 2015 Q4, and 40 points from 2015 Q1. Another 34% were “pessimistic” or “very pessimistic.”

Business leaders can’t count on governmental support. Instead, Washington’s gridlock, anti-deficit fever resulting in radical spending cuts – particularly in key pro-growth areas like R&D and infrastructure – and the looming presidential election magnify instability.

Federal level ambivalence: A senior Treasury official was recently quoted downplaying economic conditions as “not a crisis…not warranting a crisis response.” The Federal Reserve recently described the outlook as “unclear.” (5)

Looking Forward
 

All business leaders must consider how the global economy impacts their businesses. Direct impacts, such as fuel availability and pricing, interest rates, U.S. governmental gridlock and the outcome of the presidential election are obvious. Less obvious is how the confidence level of current and/or prospective customers – businesses or consumers – affects their purchase intent. As well, decisions made by you, your competitors and those in your supply chain may drive quite different scenarios.

Those who monitor relevant indicators, and create internal agility will be well-positioned to weather an economic storm.

Action Items
 

  1. Along with your leadership team, evaluate varying types of risks with the objective of identifying those most likely to create issues for your organization. Prioritize these risks and assign teams to evaluate each risk, likelihood of occurrence, probable triggers, size of potential costs (time, direct and indirect costs, and disruption/distraction) and present summary to the leadership team.
  2. Using the outcomes from the risk assessment exercise above, identify potential triggers and other prospective indicators. Assign a task force to create an ongoing monitoring program designed to identify and evaluate risk likelihood, along with key steps to take to avoid, mitigate or manage each risk.
  3. Create an internal, cross-functional team with the assignment of identifying and recommending opportunities for the organization to become more agile in responding to external factors/events. Evaluate opportunities quarterly and implement plans as appropriate.
     
Sources:
1. Talley, Ian, “The IMF Is Sounding the Alarm. Is Anyone Listening?”, The Wall Street Journal, March 8, 2016
2. Ewing, Jack, “E.C.B. Takes Bold Steps to Stimulate Eurozone Economy”, The New York Times, March 10, 2016
3. “Despite forecasters’ best efforts, growth is devilishly hard to predict”, The Economist, January 9, 2016
4. Kuehner-Hebert, Katie, “C-Suite Optimism Falls Sharply – AICPA”, CFO Magazine, March 3, 2016
5. Rattner, Steven, “Who Gets the Blame for the Slowing Economy?”, The New York Times, March 10, 2016
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