Inflation, Recession or Stagflation? The confused state of 2022
The last two years since the pandemic have been mostly difficult for everybody, but especially so for economists of the world. It’s almost as if their worst nightmare has come true. How so?
Economists generally look at three macroeconomic variables to determine the state of the economy: GDP, unemployment and inflation. Each of these are important indicators of growth, stability and affordability. Under normal circumstances the rise or fall of one or two of these parameters simultaneously affects the third one negatively and vice versa. E.g. You can’t grow your GDP at a strong pace while keeping unemployment low without suffering through the pains of price hikes or inflation. There’s always a trade-off.
However, 2022 came with multitudes of unique situations. Just when we thought that recovery from the supply-chain disruptions of the pandemic were on the horizon, shocks emanating from the Russia-Ukraine war and covid-lockdowns in China continued to sustain supply shortages. Rising headline inflation across the globe has caused a cost of living issue in many countries. Central banks across the world have clear mandates to bring price stability and control inflation resulting in rising interest rates as witnessed by the US Fed rate hikes and recent repo rate hikes by RBI in India.
According to the World bank’s latest Global economic prospect report, the global economy may be entering a protracted period of slow growth and elevated inflation. From the data available on OECD, the first quarter GDP growth of most G7 nations except Germany has seen a sharp slowdown in growth as compared to the previous quarter (fourth quarter of 2021), and the trend is more likely to continue in the second quarter of 2022.
Sticky inflation, tight labour markets combined with slow overall growth (recession) seems to be the state of the economy we are currently observing in 2022. There is little scope of any government aid coming to relieve this situation or give the economy a quick boost in the near term as for most governments “inflation” is the bigger enemy. The impact of this on businesses is multifold. As an example a non-banking financial company (lending companies that cant take customer deposits), is a type of corporate that is sandwiched between these two opposing forces and is being squeezed badly.
The business of NBFCs is dependent on wholesale borrowing and lending loans and advances. The requirement for raising funds to acquire marketable securities or loans from banks or government authorities and lend them in the market is continuous for them, as “funds” is the raw material for the business of NBFC.
With rising interest rates borrowing becomes expensive and the cost of liabilities go up. Most mid-size NBFCs cannot afford higher borrowing costs, as they can’t pass on these costs to their customers. Sounds like a doomsday scenario doesn’t it?
So how can companies get out of this sticky situation? Is recession proofing really possible?
Recession Proofing : Spring cleaning season is upon us
Businesses will need to think outside of the box to sustain growth and profitability under current circumstances. It’s time for “self-introspection” and “spring cleaning” for businesses.
Optimise your liabilities & cash flows: Keep a close eye on your liabilities and cash-flows. Try to consolidate your debt wherever possible and simultaneously lower your operational expenses to improve profitability.
Increase Revenue Profitability: Focus on your profit contributing business activities. Profitability (portfolio analysis) analysis by business units or audience segments will also help to reduce the shrinkage as much as possible.
Improve business diversification: Widen your supplier base and increase the breadth of clients to maximise revenues and maintain operational profitability.
And, most importantly,
Invest in a system that can help you achieve transparency into your business and help you stay focused on profitability. Businesses enabled with data-based strategic insights will have an edge in overcoming the impact of recession. Data-driven decision making is key to restoring investor confidence, enhancing fundraising capabilities and recession proofing your business.
Also, don’t panic, this has happened before in the world. If you look at the history of recessions in the world, the time to recover has shrunk significantly with each recession cycle and thanks to the power of human innovation, the best firms coming out of recession are the ones who looked internally and adapted to their environment better.
About The Author: Arshdeep Jindal, Founder Finvisage
Arshdeep Jindal (AJ) is the Group Treasury Officer at Dare Global – an energy tech company using the power of data science, analytics, and proprietary trading algorithms to help the world reach a renewable future, faster. He is also the founder of Finvisage, a cloud SaaS solutions company providing market risk management solutions to enterprise finance and treasury teams. AJ has deep expertise in futures market and derivative trading. He has worked with Standard Chartered bank as an Energy options trader where he traded tens of thousands of OTC contracts, many more future contracts and managed the largest commodity book in the bank.