Half empty or half full; why business leaders should stop speculating about the economy and get transformation done

Looking the latest data releases, with inflation plateauing or declining, an expectation of more moderate interest rate rises, robust labor markets and improving corporate and consumer sentiment, one could think that we are already out of the worst. But at the same time the war in Ukraine, remaining COVID-19 epicenters, trade tensions and piled up transformation homework are heavy, potentially catastrophic burdens for business leaders.

?Are markets and companies more resilient, as they have proven to be in the last two years, or are the reserves slowly running out and is the worst yet to come? Can we just rely on the continuing resilience of markets and companies, or have we reached the limits of “in-the-box adaptations”?

?The pace of growth in 2023 is still highly uncertain. The International Monetary Fund?(IMF)? has upgraded its forecasts for growth in 2023, but it is still below the long-term average. But I think it’s too early to tell whether this downturn will be temporary and shallow or more severe and persistent, or some other combination. It is more likely to be country-specific and will be dependent on both the monetary and fiscal decisions made in those countries as well as their dependence on energy markets and sensitivity of key supply chains.

In this context, we do not see the clear-cut cycles and counter-cycles that we know from the past. The disruption that we are currently experiencing has multiple drivers and is likely to stay. While monitoring the markets can provide a signal for the strategic planning process it should not be the main reason to procrastinate on necessary transformative to-dos.

?There may be many perspectives on the market outlook in an environment with low visibility, but the fact that we are in a major societal and corporate transformation is clear.

?So, what does this mean for CEOs and the decisions they make about their strategy going into 2023 and beyond? Again, the decisions they make this year need to be based on the experience and lessons learned from the past three years as well as evidence from that post-GFC environment.

?What we do know is that those companies that made bold decisions in the face of uncertainty in those crises reaped the benefits of a faster growth in the eventual upturn.

?CEOs will need to focus on five critical areas in 2023:

1. ?Focus investments on future optionality: Companies are aware from the experience of the post-GFC environment that cutting back investment now will leave them exposed to falling behind in the upturn and losing momentum on required transformation. When planning investments geostrategic considerations will play a more important role than in the past.
2. ?Sustainable businesses will be the new winners: Companies need to think beyond carbon emissions to a wider range of environmental, social and governance (ESG) issues – and these will be different across sectors and geographies. Underpinning all these risks is the growing evidence that employees, society, government and other stakeholders are setting new rules for companies to operate within.
3. ?Human capital is expensive to replace: The past two years have shown that companies that make hasty decisions on downsizing their workforce will likely not only pay a higher price when it comes to replacing critical skills, they will also find that the talent they want to retain walking away. Investing in the experience, retention and recruitment of talent now will likely elevate returns in the long term.
4. ?Financing transformative growth should not be a rate-driven exercise: Even with interest rates expected to rise further in 2023 and stay higher than pre-pandemic levels for longer, investment in future growth should not be delayed in the hope that rates come down to the ultra-low environment seen over the past decade.
5. ?Last, but certainly not least, transformation needs to be financed holistically: With interest rates rising and alternative investors applying additional scrutiny in a disrupted market, internal financing is becoming ever more important. Optimizing working capital and building the most efficient capital structure, based on a light asset footprint, and having resilient structures will become increasingly important. Profitability still rules on the capital markets and maintaining margins will be key to maximizing the funding for the transformation that is required.

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The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms