2023 will be tough, but there is cause for optimism

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An economic and geopolitical forecast for 2023

At the start 2023, we are sailing headlong into a perfect storm of higher interest rates, higher energy costs, ongoing inflation and the greatest geopolitical instability the world has seen for over 70 years. We also face the associated individual, team, workforce and humanitarian pressures that result from the interaction of these events.

Despite this, Cambridge Management Consulting is enormously excited and optimistic about 2023, and our ability to help our clients in this maelstrom of uncertainty. Below I set out the major challenges for the year ahead in the global economy, geopolitics, humanitarian efforts and the environment. Following this I offer my thoughts on why there is cause for optimism and briefly sketch out the economic landscape that will emerge later this year.

Economic

So far, we haven’t really seen anywhere near the full impact of the combination of high inflation, high interest rates and higher energy bills—certainly not in Europe. A reasonably impressive scramble by European countries to switch from Russian gas to alternative energy sources has starved Putin of his only economic card and prevented what could have been a disastrous winter for Europe.

This isn’t without significant impact in terms of the inflationary pressures of higher energy and the environmental impact of restarting—or a delay in closing—coal-fired power stations in Europe’s three largest economies. The US and much of Asia have been largely insulated from Europe’s energy shortage, but they are obviously not immune from some of the other inflationary and supply chain issues caused by the war in Ukraine.

When the real impact of such an enormous rise to costs in Europe hits in 2023, the effects will be far more pronounced than last year. Many companies will go into receivership in Europe due to rising energy costs alone—aside from the inflationary pressures on their other input costs and wage inflation—and people will default on their mortgages in volumes; especially in the UK where average savings are virtually at nil. Banks are almost certainly unprepared for this, which will place further strain on the financial institutions in general.

European banks must quickly get their plans in place for major mortgage defaults and many utility providers must be similarly prepared for large-scale payment defaults. Both thankfully have the ability to weather the 2023 storm due to previous regulatory actions in the Finance Industry and the cash reserved by the energy giants. Smaller financial institutions, neo-banks and utility providers are likely to be less fortunate and we have seen this already in 2022.

COVID-19 is still prevalent throughout China after the inevitable acceptance that a herd immunity of sorts is the only possible scenario. This has significantly reduced China’s production output at the start of 2023 and contributes to inflationary pressure and worldwide supply-chain issues for scarce minerals and electronic components.

Geopolitics

With Russia’s continued aggression in Ukraine and its desire to widen the conflict to include Belarus and Iran, the world remains in its most precarious geopolitical state for many years. The economic challenges exacerbate the potential for wider uncertainty and crisis—caused by, primarily, the higher price of food.

Defeating Russia in Ukraine as quickly as possible in 2023 is crucial for world stability and the global economy. To prevent further humanitarian crises, the summer and early autumn grain harvests from Ukraine will hopefully suffer less disruption than last year, and critically they must reach Africa.

If Iran remains neutered by its own internal strife or kept in check by neighbours, hopefully this will prevent the spread of conflict to the Middle East. In the short term, sanctions on Russia seem to be having the desired impact (even if they not immediately or visually obvious) and expanding sanctions on Iran, as well as preventing the supply of certain western goods, will be an effective strategy in 2023.

Humanitarian

Sadly, many people, and the majority of the poorest, will have a very tough 2023. Even middle-class European families will be put under enormous financial pressure this year—especially if they’re coming off a fixed-term mortgage. This will lead to increasing industrial action in Western economies and the resulting productivity loss.

It will be interesting to see the impact of increased Russian mobilisation on its own people and economy as many essential factory workers and labourers are sent off to war. The United States has been largely immune, to date, due to its energy sufficiency but it has unfortunately had its own Winter of Discontent due to a series of climate and weather disasters.

Nature was kinder to Europe, with an early cold snap and then relatively warm Christmas. However, we are mortgaging our future once more in Europe and the US by continuing to use, and in some cases dramatically increase, our use and reliance on fossil fuels. The impact on climate and air pollution will cause natural and humanitarian issues for years to come and worsen the lives of the poorest people globally.

Causes for Optimism

Despite the huge social and political issues that will reverberate throughout 2023, we can still hope for resolution and stability.

Europe survived what could have been a disastrous Christmas period. Strikes are having less impact than Unions predicted: the pandemic made well-run companies highly resilient to workforce disruption. The US survived its worst temperatures for decades. German factories continue to produce a decent output. Ukraine continues to make steady progress against its aggressor. And the UK economy actually grew 0.1% in the last quarter of 2022 to almost everyone’s surprise.

If Ukraine can be armed to defeat Russia by late summer or autumn, and Iran contained, there is hope that some measure of global stability can return. China should remain on the fence as far as Ukraine is concerned thanks to Russian losses on the battlefield.

If COVID-19 in China progresses quickly there is a good chance that productivity and factory output will increase in the latter half of 2023 and start to export some welcome deflation to the world economy. If the deflationary pressures come soon enough, they will ease the wider economic risks and save many individuals and companies from economic ruin. China’s own balance sheet could do with a fresh injection of foreign orders, and self-interest should provide an incentive to increase output.

Despite the environmental damage done in Ukraine by the conflict, European households have cut back on energy usage and there might be permanent changes that offset some of the damage done through a partial return to coal. Although Greta is unlikely to forgive Germany for its controversial decision to reopen lignite mines, our attention should be on Poland, whose economic growth and use of fossil fuels is starting to put the rest of Continental Europe in the shade.

Many European companies and assets will remain good value to US companies who will be tempted by the strength of the dollar and low US growth rates into inorganic growth. The phenomenal amount of fibre being laid will continue to increase broadband speeds in the US and Europe, providing a platform for the digital transformation of many businesses. This will result in a more reliable communications infrastructure globally, especially when combined with the progress of LEO satellites.

Manufacturing businesses will start to emerge from the supply chain issues of the past few years and with the combination of easing inflation and improving supply-chains—especially for semiconductors—there is a definite cause for optimism.

However, manufacturing businesses that haven’t shown diligence with their energy contracts will face challenges whatever the performance of their wider business looks like.

The consulting sector

Cambridge MC is incredibly optimistic from a services perspective. We may be biased, as our business doubled during the pandemic and does feel recession-proof. We have proven ourselves as a reliable partner for the challenges ahead and we continue to help companies grow and save more money.

Whatever the challenge—reducing IT or telecommunications costs, driving digital transformation faster, managing energy costs, disposing of non-core assets, opportunistic M&A or accelerating organic growth through better sales and marketing—we are seeing growth in all these areas of our business.

Some other consulting organisations are seeing the same, but it tends to be the consultancies that are adding business value through real-world experience and not the more traditional consulting firms focussed on producing very expensive slideware.

We wish you the very best in 2023. If you need our services to prepare ahead and find growth opportunities and save money, please get in touch.

Best wishes, Tim Passingham

About Cambridge Management Consulting

Cambridge Management Consulting is a global management consultancy with an emphasis on digital transformation and business impact. We focus on overcoming barriers in complex business transformations using an agile service approach and our global talent pool.

We firmly believe in the value of real-world experience. That is why we do not hire consultants. Instead, we hire leading experts with a track record of driving growth and innovation.

Cambridge MC has offices in London, Paris and Tel Aviv, and over 120 consultants in 18 countries.

Our services fall under four integrated consultancy practices: Technology, Process, Strategy and People; and we operate across all major vertical markets.

For more information visit: www.cambridgemc.com