For many businesses, this is going to be a rough fall and potentially even a rougher early winter as a result of the global economic slowdown. I don’t think everyone has fully absorbed the economic impact of the situation and I have been receiving quite a few emails and calls from past Advantexe clients who participated in our business acumen and business leadership programs asking for help and guidance in terms of applying new skills toward making the best business decisions over the next few months. The purpose of this blog is to share some ideas and thought leadership on what is happening, how to react, and ultimately, the business acumen impact of the slowing economic growth.
At the macroeconomic level, most of the issues we are facing are a result of economic slowdowns in Asia, specifically in China. Many US, European, and Asian companies made big financial bets – including capacity, people, and infrastructure – on forecasted growth that is simply not happening. The entire global economic system of business is feeling the impact as it transcends to local economies. Here are four fast perspectives to integrate into your thinking and planning.
It Starts at the Base: Core Materials, Chemicals, and Commodities
China grew to be the world’s largest and most important consumer of core materials including commodities, basic materials, and basic chemicals. A slowdown in Chinese economic growth directly means a slowdown in the demand of core items. That means there will be lower prices (deflation) for all of these materials that China had been consuming at record levels.
Here’s where the interconnected global economy has an impact: deflationary pressures will keep interest rates lower for even longer. It is almost now guaranteed that the US Federal Reserve will not increase rates between now and the end of the year. The impact of no changes to the interest rates means that mortgage rates will also continue to be very low as will returns investors receive from their savings and checking accounts.
Second: Less Prosperity in China Means Lower Demand for Oil, Gas, Cars, and Elements that Drive the US GDP
On my most recent trip to China, I was astounded by the number of luxury automobiles that seemed to be every place. Many expert economists were predicting that the continued high demand would cause gas and car shortages, which would lead to catastrophic economic turmoil. These predictions caused many companies and investors to aggressively invest in alternative fuels sources and innovations such as electric cars. Tesla, for example, decided to build an enormous battery plant in upstate New York as a result of the forecasts.
As we are seeing, none of that turned out to be true; gas prices continue to drop and there are high levels of crude, gasoline, and automobile inventories in most countries. These issues will drive prices down even further. Because of this, many are wondering if Tesla and other innovators of new approaches to energy will be able to survive this downward cycle.
This is where it gets even more interesting. While on the one hand people will be happy that prices are lower and they can buy more at lower process, there is also a significant impact on jobs.
Third: The Impact on Jobs
When demand goes down, so does job growth. And it’s new job growth that fuels economies. We are just now seeing the latest job data and the results are very disappointing. The latest September reports showed that employers only added 142,000 jobs which was below expectations. The critical issue here is that if Asian demand is flat or low, their need for jobs will also be flat and low.
Fourth: Continuing Healthcare Cost Increase is a Wildcard
In most economic situations, when prices on cars and homes drop, consumers spend more money on them because they are getting great deals. In some instances nowadays, though, extra disposable income that would be going to consumables is going toward healthcare premiums and other health related costs that have gone up over 40% since the inception of the Affordable Care Act.
In summary, we are in an uncertain situation right now and unfortunately there is no evidence that the Chinese slump is going to end any time soon. The suggestion here is to think more strategically, execute more efficiently, sell more tactically, and make every decision with a P&L mindset.
