In an economic downturn, businesses need to understand that government policy plays a significant role in reshaping the country’s future, which aligns with the global economy and how Australia will progress or decline from a top-down approach. Inflation is here to say for a while longer. How ill do companies react to rampant inflation and fractured supply chains?
Changes in economic activity impact social and security implications and require policymakers in governments and international organisations to consider the most appropriate policies to reap the rewards of digital transformation while avoiding its adverse economic and social effects.
The arrival of Covid-19 had a profound social and economic impact on countries around the globe (IMF, 2021). Faced with the prospect of exponential losses of human life, governments intervened with commercial trading restrictions and stay-at-home orders to stop the disease from spreading, simultaneously decimating economic activity and disrupting once efficient supply chains (Liu, 2021). Covid-19 was the catalyst that created an imbalance in the delicate economic equilibrium of supply and demand. However, the combination of manufacturing and supply chain disruption, an oversupply of money, geopolitical instability and labour shortages has kicked off an inflationary feedback loop (Dickman, 2021).
Energy and food are the focal points of news headlines, alongside erratic weather and a more unpredictable planet with accelerating climate events that quickly add to the deficits of economies (Levi & Molnar, 2022). While consumers are struggling to cope with spiralling costs of living, central banks are scrambling to raise interest rates to rein in inflation that was clearly not transitory (Rugaber, 2022). The impact of rising costs across the board is disconcerting for business stability and the short-term to medium-term sustainability of the global economy. Of greater concern is the distinct possibility that inflation will persist despite all current efforts, resulting in a recurrence of stagflation last seen in the 1970s (Nielsen, 2021). As a recession looms, vulnerable citizens of the world look to their governments to help address the conditions in markets. At their disposal, governments have two primary tools to influence change (Monetary and Fiscal policy).
Monetary Policy
Monetary policy involves the management of the money supply and interest rates by central banks. Central banks cut interest rates to stimulate a faltering global economy, making borrowing less expensive while increasing the supply of money (RBA, 2016). Governments in many first-world economies paid citizens cheques to influence spending and to keep their economies turning through the pandemic (Shannon & Carlson, 2021). However, the actions of central banks have now come back to haunt countries as debts have ballooned on government balance sheets, flowing over into the public and private sectors as governments attempt to claw back some of the monetary stimuli they injected into the economy (Institute of International Finance, 2022).
The government’s give and take actions in the short term, and the quick signal changes from federal reserves to counteract rampant inflation by increasing interest rates have begun to affect businesses and consumers. Record low-interest rates and government support incentivised inexperienced, desperate first-home buyers to enter an overheated market. Many buyers purchased properties with minimal deposits and leveraged variable-rate loans to maximise the benefits of low cash rates on the basis that interest rates would not increase until 2024. The stark reality, however, is that many of these buyers will soon default on their loans as the quick succession of rate hikes impacts affordability (Khadem, 2022). These mistakes are not easy to rectify, and young couples and first-home buyers could see their debts expand considerably in the short term with prolonged trailing deficits to pay back well into the future.
Generally, a tightening monetary policy is utilised when an economy grows too rapidly. The central bank, at this stage, implements a tightening monetary policy by raising interest rates and removing money from circulation (RBA, 2019).
On the other end of the scale, wage and salary increases are encouraged by governments yet, are falling short when attempting to close the inflation gap as prices continue to soar (Spencer, 2022). Monetary policy was used constantly throughout the Covid pandemic to alleviate the pain of stay-at-home orders and forced trading restrictions. Governments needed to keep the movement of citizens at a minimum. However, this also forced them to take action to save businesses from going under and protect citizens’ livelihoods, with government stimulus the lever used to prop up the economy. The government may have made the right call at the time and with the information provided. However, overstimulation and money directed at supporting businesses also fuelled a zombie economy, as government stimulus acted as a life support system for poor-performing organisations doomed to fail long before the arrival of covid-19 (Joye, 2021).
Fiscal Policy
Fiscal policy uses government spending and taxation to influence the economy. Fiscal policy determines how the central government earns money through taxation and how it spends it to help create a stronger, more robust economy that presents a future vision to which companies and external investors can align. To stimulate the economy, a government will therefore cut tax rates while increasing its spending; to cool down an overheating economy, it will raise taxes and cut back on spending, as seen in most economic activity in recent months (CFI, 2022).
Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty. For the most part, this has resulted in improved standards of living in most economies, and if we reflect on what the world was like a century ago, it is easier to observe the significant leaps in global improvement. Nevertheless, advancement comes at a cost, as evidenced by hyper-consumerism, and the interconnectedness and fragility of markets are laid bare by war and changing geopolitical strategies. Combining monetary and fiscal policy could work in helping rebalance inflation in the future. Nevertheless, there are no clear paths governments can take to pay down global debt in the short term to medium term as families struggle from the impacts of inflation and the economy enters a recession.
Now that we have discussed an overview of current occurrences and the tools deployed to enact change from a government level, it remains to be seen whether inflation will increase or decrease in the months ahead. Economists are divided, as some suggest we have reached peak inflation, whereas others argue that inflation will still rise well into 2023 (IMF, 2022). The overshooting of monetary policy and drastic changes to the federal reserve’s signalling and actions to increase rates create instability in markets. Unchecked, this could lead to long periods of decline and possibly even a depression. While we are far from seeing a depression (though much closer to a recession), it is worth discussing both extremes to ensure we are aware of all potential outcomes.
The Psychology of Inflation
Inflation is also a psychological measure of market sentiment which guides investment activity across sectors. Food security and self-reliance become critical focal points for governments to address, manifesting in the form of scant supermarket shelves and declines in product diversity, which continue to force up the price of goods and services (Chappelow, 2021). It is reasonable to consider that there will be deeper divisions and segmentations of trade and investment as currency wars continue to take place, and geopolitical strategies cause a rift in global market fluidity, exacerbating the already fractured supply chains (Pollard & Cherry, 2022).
The technology sector has seen contracted investments, and tech stocks have dived on the back of overinflated valuations (Thompson, 2022). The hype has even fallen away from cryptocurrencies like Bitcoin and Ethereum, demonstrating that liquidity is tightening and savings are slowly diminishing (Hasan et al., 2022). Housing prices are also beginning to fall in some countries, although there is expected to be a delay in other markets due to property markets’ significant role in investment strategies and portfolio diversification (Press, 2022). Countries like Sri Lanka, Zimbabwe and other emerging economies are on the brink of failure, and without bailout loans from the IMF, populations will continue to decline. Ageing populations can also expect less human care aid to replace current workers while demand for such services will continue to expand (World Health Organisation, 2021). It is fair to say that global turmoil will not end in the near term, and needs must adapt to inward-focused mechanisms before exports and trade are re-established to the same capacity.
Investments
In Australia, superfunds have invested in mainly tangible (safe) assets like homes and commercial infrastructure that support business development and a higher standard of living. The property market has seen immense growth through the decades, but now a tricky question of affordability threatens the long-trusted investment strategy (Yardney, 2021). It currently takes two or three working adults to afford a home loan comfortably. Yet, with the impending changes in the jobs market as we enter the next innovation cycle of web3, blockchain and the internet of things (IoT), there is an education gap to bridge the present to the future (World Economic Forum, 2021). A lag in bridging the education gap will see laggard economies slide backwards and GDP growth stagnate (Franzino, 2022). Investments must be targeted promptly at education and the areas of the market that are positioned for immense growth to play a significant role in the future economy and to be on track with global innovation cycles.
Furthermore, as security becomes the central focus for global leaders, countries like Australia must continue to increase their defence budgets while making partnerships and alliances that deter physical encroachment and economic challenges within the region. However, the actions Australia takes on this front will have an impact on inflation, as countermeasures from countries like China will negatively affect Australia’s GDP before new trade relationships are forged to counterbalance trade declines in trade (Hellyer & Stevens, 2022).
Conclusion: Complexities of the World
As expected, the world is becoming more complex while expanding the gap between rich and poor. Socioeconomic impacts of rapid change and declining dollar purchasing power increase crime rates, poverty and despair as people fail to see a silver lining when the weight of the world seems to get heavier with every step. Governments must act quickly to structure new frameworks to support the global market. From a personal perspective, my view is that inflation will continue to rise before some market stability is realised, as there are many issues to address simultaneously. Companies must reflect on the pertinent points discussed in this article and re-evaluate their business strategies and personal investment portfolios. From a business strategy standpoint, Strategy Hubb is well placed to facilitate planning and restructuring.
In times of economic downturn, there can be a tendency for organisations to jettison their talent, aggressively reduce spending and adopt a defensive position that exploits current products and services in the hope of riding out the recession. Contact us to help make prompt adjustments to your organisation’s business strategy. Companies may require a radical shift or gentle pivot to align with market cycles, innovation cycles and investments. Nevertheless, constant change requires constant realignment. Mitigate risks and find counterbalancing measures to turbulence in the global economy with Strategy Hubb (Babbage, 2022). Companies typically make more dramatic and sustainable gains or losses during a downturn than during stable periods. So let us help you to reposition now for a more robust future!
Disclaimer: Please note that the information provided in this article is not to be considered as financial advice. Please seek advice for your personal or business matters from a qualified professional or make contact with myself or one of the team at Strategy Hubb to tailor custom solutions to accommodate your circumstances.