In 2019, the economy defied expectations. Despite talk of a downturn and hordes of executives sitting on pins and needles, it never materialized. Economists were baffled by the juxtaposition of record-performing markets amid indications that a recession was on the horizon. To be fair, in any other cycle, those predictions would have probably come true — but not this time. It’s hard to remember a time when the economy was this … well, mystifying.
As we enter 2020, global uncertainty is still the name of the game. On one hand, conventional indicators of a boom economy are in full effect. In the first full week of 2020, U.S. stocks set records as all three major indexes — the Dow, S&P 500 and NASDAQ — closed at all-time highs. In Europe, interest rates are expected to remain in negative territory throughout 2020 while the trend of lower interest rates persists across much of Southeast Asia. In the U.S., interest rates remain low as the Fed claims it expects to maintain the current benchmark rate (a range of 1.50% to 1.75%) through 2020. On top of that, U.S. unemployment is holding steady at a 50-year low.
On the other hand, the full picture is less than rosy. Key trade agreements are either nascent or still in a state of flux. The Senate recently approved the USMCA deal (formerly NAFTA), and it’s to be signed into law tomorrow. And the U.S. has only recently made strides on phase one of a trade deal with China. Some tariff reductions are anticipated, but will it be enough to ease concerns? The average tariff on Chinese goods is expected to be 19.3%, which is six times higher than what it was before the trade war with China began in 2018. That’s one reason why U.S. manufacturing output contracted again for the fifth consecutive month in December 2019. The 2020 outlook for global manufacturing isn’t faring any better. According to Moody’s Investors Service’s annual year-end report, slowing economic growth worldwide alongside trade tensions will continue to weigh on manufacturers’ earnings.
And then there’s corporate debt. Global figures indicate corporate debt levels are at $19 trillion. In the U.S., at nearly $10 trillion, or 47% of the overall economy, companies are continuing to acquire debt at record levels as they enter 2020, including low-rated companies.
How will companies pay down this debt without negatively impacting working capital? What will happen when interest rates rise?
These are fair questions that have caused the Fed and the International Monetary Fund to sound the alarm that the current trajectory is both unsustainable and dangerous over the long term — especially the destabilizing impact it would have if a recession occurs.
Speaking of recession, what are the odds of this in 2020? If 2019 taught us anything, it’s that all predictions should be taken with a grain of salt (or maybe a salt lick). But here’s what the experts have to say:
In a recent survey by the National Association for Business Economics, 74% of U.S. business economists think the economy will slip into recession by the end of 2021. According to the Duke University/CFO Global Business Outlook, over half (53%) of U.S. CFOs believe the U.S. will be in an economic recession by the third quarter of 2020, and 67% predict a recession by the end of 2020. Similarly, 72% of CFOs in Asia believe their countries will be in recession by the third quarter of 2020, as do the majority of CFOs in Europe (69%), Canada (68%), Latin America (65%) and Africa (81%).
A Speed Bump, Not a Road Block, to Investment in Growth Initiatives
Fear of a recession in 2019 caused many companies to hold onto cash and be more conservative in their investments. While it’s likely this conservatism will continue in 2020, there is danger in the inaction that often accompanies the unknowns of economic uncertainty. Many market leaders have been buoyed by their ability to invest in the right initiatives despite challenging business conditions. Downturns and recessions have a way of teasing out high performers.
The outperformers aren’t shying away from investing in initiatives that will help them grow their businesses. Transformation continues to be a good example. We are still in a period of historic transformation across virtually every industry. Consumer electronics companies can’t afford to press the pause button on AI, just as industrial manufacturers can’t do the same with robotic process automation (RPA). Neither can their suppliers. To stay ahead of competitors despite economic uncertainty, automotive companies and suppliers should continue to accelerate self-driving initiatives, while the struggling retail industry would benefit from scaling investments that improve the customer experience.
Another example of growing investment amid economic uncertainty is sustainability across its three pillars — economic, social and environmental. Companies face increased demand from consumers to manufacture goods using fair labor practices, sustainable materials and supplier-friendly business protocols. Meeting this demand requires companies to align their sustainability pursuits with suppliers in a way that empowers suppliers rather than hampers them. The backlash for those companies that fail to rise above these pressures can be severe.
Regulatory scrutiny, particularly in Europe, is also shining a light on sustainability. Regulators are paying closer attention to nearly every aspect of the business — from monitoring environmental impacts to issuing directives on when suppliers should get paid.
“Checkbox” sustainability won’t cut it in 2020. It’s not enough for companies to pay lip service to sustainability or to view it only in the context of their organization. They have to show how their commitment is executed deep within the supply chain and demonstrate the mechanisms in place to ensure transparency and accountability. Consider this: Pre-2013, only 20% of S&P 500 companies chose to disclose their environmental, social and governance (ESG) information. Today, that number is closer to 85%, according to researchers at Nielsen.
A Focus on Sustainable Growth
Working capital requirements will increase in 2020 as companies juggle transformation, sustainability and fiscal responsibility. Economic uncertainty will continue to set the tone for how business is conducted, but it’s also pushing companies to rethink how they fund growth. The onus is on companies to find new, sustainable ways to fund these initiatives without amassing additional debt — and all while strengthening their supply chain and supplier partnerships.