Opinion

Managing in the age of macroeconomic uncertainty

By Michael Thorneman, Johnson Chng and Andrew Schwedel
Updated: 2010-10-27 13:45

As we finally emerge from the depths of the Great Recession, a lot of attention naturally focuses on trying to handicap the speed and strength of the coming rebound. Some forecast a quick snap-back driven by years of pent-up demand. Others see a slower, more grudging recovery defined by deep unemployment and persistent credit issues.

For anyone running a business, however, the more important point is that no matter how fast the turnaround comes, success is unlikely to get easier. The plates have shifted beneath the global economy in ways that will increase competitive pressure and squeeze even the most recession-hardened business models. The winners coming out of this seismic event will likely be those agile enough to spot the fault lines quickly and adjust their strategies accordingly.

China is a prime example. Businesses everywhere should closely track signs that the country's strong growth may be cooling. Weak growth in Europe, coupled with the continent's debt problems, uncertainty in the US, and the diminishing competitiveness of Chinese exports all are taking their toll. Any slowing of the Chinese economy would have worldwide implications. Dropping European demand means fewer Chinese exports at a time when many US consumers are still struggling. While 18 percent of the China's 2009 gross domestic product (GDP) was from government stimulus spending, both inflation and wages are rising. At the same time, analysts remain concerned that the mainland's overheated housing bubble will burst.

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For business owners in China and elsewhere, the cost of capital is Exhibit A in the list of factors that prompt rethinking their strategies. In China, the government has been taking decisive action to curb growth in bank lending. Meanwhile, massive government borrowing, for instance, will increasingly “crowd out” the private debt markets in the developed world as governments compete with private borrowers for available funds. And the credit markets are still very much on edge due to unfolding trouble in the US commercial real estate market, the ongoing Greek tragedy in Europe and the concern that an overheated China and other developing markets may be awash in bad loans. In the US and Europe, uncertainty about the outcome of regulatory reforms has further constrained lending, with financial institutions nervous about their ability to provide capital. A bursting housing bubble in China would redirect Chinese capital back to domestic programs, further reducing available capital abroad.

For managers, the end of the easy-money era means a fundamental rethinking of how to finance investment. Funding projects from internal cash flow will be more reliable, but may constrain growth and will certainly favor businesses with ample cash and strong balance sheets.

Financial flexibility will be especially important since two opposing trends will squeeze profits for a variety of industries around the world. Globalization has continued to erode pricing power. On the other hand, the voracious appetite in the developing world for everything from copper to oil is driving up commodity prices.