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Preparing for the U-Shaped Economic Recovery

Aug 28, 2020 1:30:00 PM

by Charles Bystock

Just a few short months ago, economists predicted the V, a short-term, sharp economic dip, followed by a brisk recovery. Now, well into the third quarter, with COVID-19 showing few signs of slowing, it’s clear we’re in more of a U-shaped economic recovery. With the latest GDP numbers reflecting a 39% quarterly drop, a small and dwindling number of economists remain optimistic about what’s ahead. With this revised outlook in mind, how should the c-suite prepare?

Taking the pulse of the current economy

In April, a poll of 3,534 chief executive officers (CEOs) from 109 countries showed that 60% believe a U-shaped economy is inevitable, and more than 50% recognize COVID-19 as a risk to their business. By August, Bloomberg confirmed that the recovery will be slower and weaker than we anticipated at the beginning of this crisis.

Goldman Sachs predicts unemployment will hit 25%, numbers not seen since the Great Depression. This is a gloomier forecast from a few months ago when a few economic holdouts were still suggesting that the global economy would rebound quickly from COVID-19. In the U.S., much of the downturn can be attributed to a slow-down in consumer spending, particularly in healthcare, when elective procedures were canceled, and in restaurants, where spending dropped by half nationally in March. Today, 41% of business leaders in the restaurant and hospitality sectors say their businesses may not survive. Other industries also have suffered; for example, U.S. manufacturing slowed in April as auto production declined. But by far, retail, transportation, and hospitality felt the biggest shift in consumer demand — by about 80% to 95% in March and April.

We’ve not seen this kind of global slow down for decades. Looking ahead to the fourth quarter, what can we expect?

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Economic predictions for 4th quarter

Predicting the future from a risk we have no experience with in modern times is a dicey proposition. But an article in Chief Executive asked economists to look into their tea leaves to layout their future economic forecasts in the U.S. The latest predictions include:

  • Forecasters call upon the U.S. government to prevent a bankruptcy domino effect. Cascading small business bankruptcies would be the start of defaults and bankruptcies that will weaken lien holders, close companies, and potentially cause the downgrade of corporate debt.
  • The U may be more like a lazy W, which sounds more like a cattle ranch than an economic prediction from a leading economist. But without additional stimulus money, a slow recovery in the U.S. is an inevitability under these forecasts. In this scenario, many small businesses will simply not reopen, which will put semi-skilled or unskilled workers out of jobs permanently. Consumers, burned by a full economic stop, will hoard cash and be more spending cautious, slowing everything from home purchases to retail shopping.
  •  A potentially lengthy global recession is almost inevitable now, according to some economists. Worldwide economic conditions remain fragile, especially as countries play their own version of whack-a-mole on hot pockets of virus resurgence. If these countries see a virus resurgence in the fall, expect finance to worsen.

Although most financial predictions in the United States remain grim, there are steps the c-suite can take now to keep the lights on..

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Strategies to survive a U-shaped economic recovery

The best approach for the c-suite, then, is to follow the adage, “prepare for the worst and hope for the best.” CEOs need strategies to tighten belts and manage cash flows more than ever. Job one, in any physical crisis, is to first stop the bleeding to save the life of the patient. For CEOs and chief financial officers (CFOs), this means building up cash reserves, if possible. Overhead and capital spending should be carefully considered as the economy hits the bottom curve of the financial U we’re describing. But cutting costs to increase cash flow is just a part of the strategy the c-suite should adopt in the coming months.

In a volatile economy, we know that business agility is particularly important to survival. Organizations must use data to improve their ability to predict demand, and be flexible enough to shift toward markets where sales are increasing. Big bureaucracies will struggle in the coming market environment. Adaptability is as important as cash flow in this climate and bold moves will be necessary to survive changes in consumer behavior and market shifts that will drive some companies to the edge — or over.

Like the threatening prediction from Game of Thrones, the COVID-19 winter is almost here. The c-suite must face the reality of our global bottoming out during what will be a U-shaped economic environment. But you can prepare for what lies ahead in fourth quarter 2020 and into 2021 with sage counsel from the partners at the Windsor Group. We stand elbow-to-elbow with some of the biggest names in our nation’s c-suite and can help you prepare and adapt to what lies ahead.

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