What To Expect, When Uncertainty Is The Only Certainty

uncertainty only certainty



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The world’s Big Problems have always been bubbling under the surface, but major events have recently brought them into sharp focus. Our vulnerability to climate change, supply chain ruptures,  food security, data breaches, transmissible diseases and dependence on fossil fuels are undoubtedly causing severe hardship for many in the short to medium term, but if we can be permitted to light a candle at the end of the tunnel, their solutions will very likely be brought about by existing or emerging technologies. 

That’s not, of course, to diminish the terrors at this end of the tunnel. Geopolitical instability, inflation and totalitarian despots are the ghosties and ghoulies lurking just around the corner.  Even so, it was remarkable that the normally sober forecasts of the Bank of England gave way last week to such an apocalyptic, fire-and-brimstone Quarterly Review. Unemployment – already at 3.8%, is expected to balloon by a further two-thirds, but the post-Brexit labour market is expected to remain tight over the next year. Fears of inflation – accelerating to 13.3% this year (and orbiting at around 10% for the next 12 months) –  coupled with a long recession forecast starting in Q4, zero growth for nearly two years and a GDP contraction of more than 2%, triggered the biggest rate rise in more than a quarter of a century. 

But it was telling that the UK markets barely moved. There’s an animal cunning to the markets, and their instincts precluded panic. For one thing, they know that whoever takes over at No.10 will have to launch a fiscal binge the like of which hasn’t been seen since, well…2020. And for another, the Bank followed the Federal Reserve and the European Central Bank by completely abandoning Forward Guidance. There will be no mapping ahead to guide market expectations on the future path of interest rates because, quite honestly, they haven’t a Scooby. 

Rates, they announced, will henceforward be judged on a meeting-by-meeting basis, because of all the above. And of course, the Bank is as much in the dark as the rest of us as to what will be Government policy in the immediate post-Johnson era. Will Rishi shake the money tree like a mongoose shaking a snake? Or will Liz simply wield the axe and slice £40 billion off the tax revenues? 

So the simple message emanating from Threadneedle Street is “Expect the unexpected”. The New Normal is there is no normal. 

But let’s take a deep breath and examine what we know. 

In the short term, of course, we should prepare for choppy waters. According to the Bank of England’s August Monetary Policy Report, we can expect output to fall in each quarter from Q4 2022 to Q4 2023, followed by very weak growth in the ensuing year. 

With typical annual household fuel bills likely to be around three times higher next year, demand will slow, and domestic inflationary pressures will probably remain strong in the short term. Private sector wages will almost certainly rise, reflecting the tighter-than-normal labour market since Brexit and the start of the pandemic. In the plus column, however, commodity prices are not expected to rise further, and a fall in headline inflation should reduce the pressure on wage growth.

Beyond this, the economy could follow a number of plausible paths that even the Bank of England is reluctant to predict. The August Report offers several projections for GDP, unemployment and inflation, including one where wholesale energy prices stay high for six more months and another where they continue their current modest slide. All the predicted scenarios depend on the direction of (as yet unknown) Government fiscal policies – and all show wildly different projections in the second half of the forecast period. However, every single one of them predicts very high short-term inflation, falling GDP over the next 12 months and a sharp drop in inflation thereafter.

So, we anticipate that supply-chain pressures will start to ease over time, as demand slows and supply expands. This, in turn, should moderate inflation, with the Bank of England itself envisaging a sharp drop in inflation to as low as 0.8% by the end of 2024 as energy prices stabilise and the prices of tradable goods falls.

For this reason, the Bank’s tightening measures are unlikely to be as aggressive as some predict – squeezing demand would neither fix the supply chains nor solve labour and materials shortages and might just kill off the economic cycle.  What’s more, most nations are responding to the pandemic and other crises by stepping up their transition towards manufacturing and energy self-sufficiency, so Bank intervention may seem a little heavy-handed. 

The light at the end of the tunnel brightens considerably when we consider the rapid escalations in technology – electric vehicles, hydrogen power, batteries, interconnectors and renewables could combine to change the landscape beyond recognition.

Reliance on fossil fuels will therefore dissipate steadily and with it much of the hegemony of Russia (and to a lesser extent, China). 

So if businesses can get through the next few years, prospects will begin to look a little less bleak. A big ‘if’, we know – but it’s worth considering why some companies weather periods of crisis and economic volatility better than others. In fact, some positively thrive. 

The practices of many of these companies were examined by Chris Bradley, Martin Hirt and Sven Smit in their book “Strategy Beyond the Hockey Stick”. They found that the most resilient companies did differently to the rest. 

Specifically, they did three things differently. 

1.         They gave themselves room to manoeuvre – creating a safety buffer by cleaning up their balance sheets before the approaching storm. This also enabled them to accelerate out as the crisis subsided, gaining market share and making strategic acquisitions.

2.         They cut costs earlier, faster and deeper – in particular, when the storm clouds darkened in 2007, these resilient companies reacted rapidly and by the first quarter of 2008 had already cut costs by 1%, while their competitors’ YOY costs were still growing.

3.         Those in ‘countercyclical’ sectors focused on growth, and were not afraid to incur costs to do so – oil and gas companies were enjoying a mini-boom in 2008, with prices touching $120 a barrel (at the time of writing, oil is currently $96 a barrel), while demand for healthcare and pharmaceuticals remained relatively inelastic. So, the winners in these sectors were the ones who reacted to the gold rush by investing and expanding.

Counter-intuitively, this does not mean cutting expenditure on marketing. Short-term thinking sees marketing as a cost. It is, in fact, the only business function that brings in revenue. According to historical IPA data, companies that maintained or increased marketing spend through a recession, while they saw little advantage during the dip itself, experienced spectacular growth relative to non-spending competitors as the tough times started to ease. The impact is delayed, but substantial and the effects are proven to kick in at the exact time when you need them – allowing you to put on growth as the recession ends.

While it’s not a time for despair, in the short term you could do worse than prepare for the worst. Act now, make your company resilient and you can hopefully reap the rewards on the other side.

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