Insights and practical guidance for leveraging channels to counteract the impact of economic downturns.
If you’re reading this guide, you either believe or have been told the economy is in recession. Perception is critical in times like these because what companies and decision-makers believe, despite whatever evidence is at hand, will influence their investment and spending choices.
The traditional and widely accepted definition of a recession is two consecutive quarters of negative economic activity — or contracting GDP. In the United States, the National Bureau of Economic Research is the official body that determines and decides when the country is in a recession—and that often comes long after a recession actually starts (hence the reason it takes two negative quarters to officially declare one).
Economists have defined three types of recessions:
- Recessionary Conditions: A period when the economy is slow or sluggish and the indicators lead to the conclusion that a recession is either impending or already happening.
- Technical Recession: When the economy is acting as if it’s in recession, but the economic indicators are mixed.
- Actual Recession: When the consensus of economists and government agencies determines that the economy has contracted and will continue to struggle.
As of this writing, economic indicators point in wildly different directions, thereby creating uncertainty. And as we all know, uncertainty is the fog that clouds sound business judgment and erodes confidence. Here are a few factors influencing pessimistic outlooks.
- Record Inflation: The cost of goods and services in the first half of 2022 rose to rates not seen since the late 1970s. Inflation in the U.S. peaked at 9.1% because of rising gas and food prices and increasing costs for commodity goods. Similar inflation rates are occurring in other regions around the world.
- Increasing Wages & Labor Shortages: The demand for qualified labor remains high, even as economies sputter. Unemployment is typically a leading indicator of recessions, and companies are beginning to shed jobs, so the demand for human resources remains strong. The small labor pool and high demand drive wages, contributing to inflation.
- Rising Interest Rates: The central banks’ response to inflation is increasing prime interest rates, which is the amount that organizations like the U.S. Federal Reserve and the European Central Bank charge other banks to borrow money. The cascading effect is rising interest rates on cash loans, mortgages, and credit cards. By making credit more expensive, the intent is to drive down spending and dampen inflation.
- Supply Chain Disruptions: The COVID-19 pandemic obliterated the global supply chain network. As the world emerged from pandemic conditions, the demand for goods and services skyrocketed, further stressing the system. The lack of supply plus high demand created higher prices.
- Commodities Insecurity: The Russo-Ukrainian War is disrupting global supplies of oil, natural gas, grains, and other base materials. In Europe, gas shortages are driving up manufacturing costs. The lack of wheat exports in the Middle East and Africa is driving up food costs. The inability of countries worldwide to source staples is driving up the price of finished goods and resources.
- Political Instability: Every region is experiencing political instability and tension. The frequent flip-flopping of left and right political poles generates economic uncertainty by putting tax and monetary policy in flux.
The energy instability in Europe, political instability in the U.S., and ongoing pandemic conditions in the Far East will more than likely result in recessionary conditions through 2024. A recession, though, is just the beginning. The world is likely heading toward a reordering of economic zones and spheres of influence, similar to what was seen during the Cold War era. According to the Conference Board, a nonprofit economic think tank, 83% of CEOs believe geopolitical tensions will divide the world into East-Russian and Western economic spheres.1 At the very least, free market economies are already beginning the process of deglobalization, which will rewire trade relationships and supply chain routes.
This is more than a guide on how to use the channel to survive a recession. It’s also a blueprint for leveraging the channel for long-term resource augmentation, cost containment and deferment, and risk mitigation. Ultimately, the channel is a means of increasing resources with lower costs that leads to higher returns. Leveraging the channel in times of uncertainty doesn’t negate the need for investment, but it does require a reorientation of strategic thinking, policy design, and program practices.
