Some companies earned record profits in 2022, but many CFO’s will be glad to see this year end. Higher input prices, labor shortages, tighter credit and general uncertainty about the economy increased worries and subtracted hours of sleep.
There are a few signs of hope, of course big banks forecasting a soft landing for the economy as inflation and interest-rate hikes ease. But for businesses, the future doesn’t just depend on a the bank’s reactions to prices.
Events that could prove pivotal next year may be beyond our control.
Here are some major risks to look out for in 2023 and how they might affect your business.
A way of pointing out that plenty of investments can do well in an era of easy money, when investors are willing to take on more risks. But when credit starts to dry up, the companies that can’t produce cash flow start to fade away; investors insist on returns and pull back on their risks.
We’ve already seen some of the effects. Tech firms that ran on plans for the future rather than revenue in the present have been laying off thousands of employees. Many cryptocurrencies’ values and their exchanges are falling. Housing markets are dropping because of higher mortgage rates.
These trends will have a knock-on effect on the economy next year. The loss of wealth has been gigantic, with some estimates being more than $20 trillion, which is almost a whole year’s worth of gross domestic product in the United States. Only a fraction of the change in wealth will be reflected in consumer spending, but even taking 1% of that lost wealth out of spending plans for 2023 could set the economy back several months in terms of growth.
Some financial institutions have been skating on thin ice, as British pension funds recently showed. If their underlying models haven’t assigned much probability to a high-inflation, high-interest-rate environment, then they may collapse. The problem is that collapsing financial institutions have a habit of bringing down other companies as well. It seems that disruptions are inevitable despite the best efforts of authorities.
As inflation continues, other large central banks should eventually catch up. And because the credit market is global, the money they suck out of it will affect businesses in the US. Any of these factors alone could cause problems in the markets next year but especially when combined.
Risk isn’t just a financial phenomenon, either. It’s hard to overstate the effect of Russia’s invasion of Ukraine on commodity markets. Much of the early spike in inflation came via prices for fuels, energy and foodstuffs exported by both nations. In some cases, supply has been taken off the market.
The longer the war in Ukraine lasts, the more uncertainty is sure to plague the markets. Businesses that depend on commodities; whether it’s gasoline to fuel trucks or wheat to bake bread, can expect to pay more for months to come.
North Korea has become increasingly contentious, and some sources think China’s Xi Jinping may wish to cement his legacy by asserting Beijing’s claim to Taiwan. If protests in Iran turn violent, the involvement of the government’s allies in the region could lead to a broader conflict. Manufacturers from East Asia and commodities from the Gulf could all be affected. Though these possibilities may seem far off, contingency plans are essential for farsighted executives whose businesses participate in relevant markets.
Our crystal ball is looking psychedelic, with dozens of countervailing factors at work in the economy; however, while the bad scenarios are piling up, the most likely scenarios are looking better every day.
Talk of a diplomatic solution to the war in Ukraine is slowly spreading. Financial markets appear to have stabilized for the moment. Inflation has started to cool, and Americans are snapping up bargains as the holiday season gets underway. Unemployment is still very low.
Our best guess is looking rosier even while the overall forecast is getting worse. We’ve gone from expecting rain in 2023 to predicting partial sunshine with a chance of tornados.
That’s the long-term forecast, but what about the immediate future? Because businesses can book shifts in advance on my company’s platform, we can see their likely patterns for hiring workers in the upcoming months, which in turn gives hints about demand. It’s early, but so far, we are seeing slightly less activity (relative to this year) in some food-related industries where inflation is expected to continue at rates up to 5%. Bookings in goods-related industries, both production and trade, suggest somewhat more activity in the first quarter of next year on a per-business basis.
But these differences are small. Businesses are moving cautiously as they deal with uncertainty. Despite the risks, though, companies in strong financial positions are sure to reap extra benefits during this time. Their advantages in cash flow and profitability will be more salient to investors, and some of their weaker competitors will likely fold. The survivors will be able to pick up talent and market share as well as funding. They will emerge stronger, putting extra distance between themselves and the competition. Soon we’ll see who had their swimsuits on, too.
Credit to Dan Altman of Forbes for most of this content
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