Goldman Sachs predict 22% inflation in 2023 and a recession. Here are four actions companies might take in response
September 15, 2022
According to the press, Goldman Sachs economists are predicting a recession later this year and that UK inflation will rise to more than 22% next year. The pound is weak against both the US dollar and the euro. Questions are being asked about how can businesses, communities and individuals survive this latest economic crisis.
Inflation rose to nearly 25% in 1975 and was about 18% at the start of the recession in 1980/81. It had fallen to less than 5% in 1983 (source: WorldData.info). The UK interest rate was about 14% (source: Bank of England) when the 1990/91 recession started.
According to ONS statistics, the UK enjoyed 15 years of consistent quarterly economic growth between about 1993 and 2007. From the start of the 21st century, wages rose faster than inflation until the 2008 recession, when this trend was reversed. Since 2014 real wages have fluctuated above and below inflation (source: ONS).
How is this relevant to what’s happening today?
Periods of high interest rates, inflation and recessions are economic facts of life, affecting individuals, businesses and society as a whole. They are, however, also cyclical. The causes may be different but the problems are manifest, complex and concerning on many levels. The UK has been here before. History suggests that when the cycle does end, pressure on inflation and interest rates can dissipate fairly quickly. In the meantime, of course, companies and their employees are facing issues they cannot control amid continuing uncertainty about predicting when the current cycle is likely to end.
Here are some thoughts about actions companies might take. Many may already have taken all or some of them:
1. Review the business strategy and forward plan: Analyse the projected effect on the business of an extended economic downturn. Are there any refinements that can be made (e.g., to investment strategy, financing options, markets and marketing strategies) to strengthen economic resilience?
2. Revisit workforce and shareholder communications: Engage with the workforce and shareholders to explain the potential impact on the business and the actions the Board proposes to take. It is important to retain a motivated workforce with the skills and experience to deliver the strategy and sustain the business. Good and clear communication from the Board has an important part to play in helping to retain and motivate staff. Motivating a workforce does not necessarily mean paying more (at a time when it may be neither feasible nor commercially sensible to do so).
3. Take a new look at people strategy: We have written elsewhere in this newsletter about a current trend of employees only doing their jobs but not going the extra mile for their companies and the opportunities this creates. Reviewing job descriptions and assessing what is actually being done against what is required to be done in the current circumstances, enables employers to identify gaps in the organisation’s structure or skill-sets and to take action to create a more efficient (and, perhaps, more contented) workforce for the benefit of all stakeholders.
A different strategic approach to workforce organisation, utilisation and deployment (and, perhaps, a review of workforce reward structures and policy) could help the business ensure the skills and experience of its workforce are being utilised to best effect.
4. Rethink how you measure performance: Whilst there is no case for increasing executive pay, there may be a case for revisiting executive remuneration policy. Companies under pressure to introduce ESG targets into their executive incentive plans might consider linking incentive awards to workforce motivation, engagement and productivity.
Increased productivity implies increased efficiency and economic prosperity, so success in aligning and managing the workforce to improve productivity should be beneficial for the business, its stakeholders and the economy as a whole. It might also help to keep more of a valued workforce in employment.
MM&K was established in 1973. There has been a recession in almost every decade since then. As a result, we have gained nearly 50 years’ experience of helping companies develop their reward and people strategies in response to an economic downturn. To discuss or comment on this article, please contact email@example.com.
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