These are the two questions entrepreneurs ask themselves when predictions and expert analyses appear in the media. Recently, Jeremy Grantham, investment strategist and observer of speculative bubbles, and Claudia Sahm, American economist and author of the so-called Sahm rule, have spoken on this topic. Is a recession coming? What should we do? How can we prepare for a possible crisis?
How can we tell if a recession is coming?
First of all, it should be emphasized that experts do not read tea leaves. Before commenting on a possible crisis, they analyze the economic situation in detail and observe many indicators that warn of a recession. These include: the inversion of the bond yield curve, the Hindenburg Omen (a so-called bad omen), and the Sahm rule.
However, experts emphasize that none of these indicators provides 100% certainty. Therefore, this information should be treated with caution. The author of the Sahm rule herself, Claudia Sahm, warns against the misleading signals sent by the indicator due to recent changes in the labor market resulting from the pandemic or the rapid increase in immigration.
Is a recession coming or not?
In search of an answer to the question of whether a recession is coming, it is necessary to consult the forecasts of experts. Jeremy Grantham has been observing speculative bubbles for years. He points out that the craze caused by artificial intelligence could end in disaster, given previous trends and tendencies. In his opinion, a recession in the economy is inevitable.
On what basis does Jeremy Grantham draw such conclusions? Market observations show that periods of rapid growth in the price-to-earnings ratio of shares are followed by sharp declines. According to the expert, this should cause concern and caution. This situation occurred, among others, at the end of the 1980s, during the dot-com bubble, and during the housing bubble in the mid-2000s.
Since 2022, we have been seeing a similar situation with the release of ChatGPT and investor interest in artificial intelligence. Jeremy Grantham points out that the bubble is still being inflated, but every bubble eventually bursts.
However, it is also worth paying attention to other expert opinions. Claudia Sahm has developed an indicator that points to a recession in the US economy when the three-month average unemployment rate exceeds the lowest unemployment rate of the last 12 months by at least 0.5 percentage points. Its retrospective application would allow previous recessions in the United States to be detected.
Currently, the Sahm indicator is sending a signal of a cooling labor market, which points to a possible recession. However, the economist points out that the fluctuations may be due to major changes caused by the pandemic or increased immigration. This causes an increase in the unemployment rate while weakening the demand for workers. According to Claudia Sahm, unlike Grantham, a recession is not inevitable, but the risk of one is increasing.
What does a recession in the economy mean for entrepreneurs?
We already know the position of some experts in the face of doubts about whether a recession is coming. So what should entrepreneurs do in the face of uncertainty? A recession is a period in which the economy shrinks, which most often translates into a decline in sales, difficulties in maintaining financial liquidity, and an increase in unemployment. For entrepreneurs, this means the need to adapt to changing market conditions, including through cost optimization, restructuring, or redefining development strategies.
This often involves introducing savings in operations and strengthening relationships with key customers and business partners to minimize the risk of losing markets.
However, an economic recession can also be an opportunity for companies that are able to respond flexibly to change. At a time when competitors may be forced to scale back their operations, companies that invest in innovation, digitalization, or improving operational efficiency can gain an advantage and strengthen their market position.
It is crucial to make informed decisions based on data analysis and the current economic situation. Therefore, entrepreneurs should have a well-planned strategy that allows them to prepare for such situations.
What to keep in mind during a recession?
- Financial liquidity – maintaining liquidity is a priority. It is worth regularly monitoring cash flows, renegotiating terms with suppliers, and ensuring timely payments from customers.
- Cut costs, but with caution – cost optimization is essential, but it is worth avoiding hasty decisions. Cutting spending on key areas such as marketing, innovation, or development may bring short-term savings, but in the long run, it will weaken the company.
- Diversify revenue – entrepreneurs should consider expanding their product or service offerings so as not to rely on a single source of revenue. Introducing new sales channels can help offset losses in traditional or existing sectors.
- Team management – the economic crisis affects employee morale. Transparent communication, strengthening team spirit, and flexibility in work organization can help maintain engagement and productivity in the company.
- Building customer relationships – it is crucial to maintain the loyalty of existing customers. During a recession, it is worth focusing on delivering value, e.g., through flexible contract terms, loyalty programs, or a personalized approach to customer needs.
- Investing in digitalization – the crisis may accelerate the digital transformation process. Process automation, the implementation of new technologies, and digital sales channels can help reduce operating costs and improve operational efficiency.
- Risk analysis and flexibility – it is crucial to monitor risks on an ongoing basis and respond quickly to changes. Entrepreneurs must be flexible in order to adapt to new market conditions and adjust their strategies in response to current challenges.
Will a good strategy help you survive the recession?
A well-planned strategy can not only help a company survive a recession, but also lay the foundations for further growth after the crisis is over. It is worth paying particular attention to the company’s ability to respond flexibly to changing market conditions and to anticipate threats and opportunities appropriately. This is why a company’s development strategy, developed before the recession, plays a key role during a crisis.
Above all, the strategy should take into account crisis scenarios that will allow entrepreneurs to take quick action in the event of market problems. These may include a savings plan, a restructuring plan, and a response to changes in demand or supply problems. Thanks to such measures, the company will be better prepared to manage uncertainty.
A strategy is also a tool for setting priorities. During a recession, it is crucial to focus on the most important areas of activity, such as retaining key customers, investing in future technologies, and diversifying the offer.
Companies that are able to respond dynamically to changing market needs by adapting their products, services, or sales channels are more likely to survive. Therefore, it is important to invest time in continuously analyzing the situation, testing new solutions, and monitoring the effects of implemented measures.
Good growth strategies focus on analyzing key indicators, anticipating risks, and identifying specific actions that help companies cope in difficult times. They should include both short-term corrective measures and long-term development. This can reduce the negative impact on the business.
Does recession mean no growth and stagnation for companies?
Although economic recession is mainly associated with crisis, declining revenues, and reduced activity, it does not necessarily mean stagnation or lack of growth for all companies. On the contrary, for some companies, recession can be an impetus for innovation, restructuring, and a change in the direction of growth.
A decrease in demand for certain products or services may prompt companies to look for alternative markets, introduce new technologies, or transform their business model. It is precisely during a recession that companies often decide to increase their investments in process automation, digitization, or e-commerce development, which allows them not only to survive the crisis but also to emerge from it stronger.
During a recession, many companies reduce their spending on marketing, research and development, and innovation. For entrepreneurs who are able to maintain investment in key areas, this can mean greater opportunities to stand out in the market and win new customers who are looking for more effective and modern solutions.
A recession certainly brings challenges, but it does not automatically mean a lack of growth. On the contrary, companies that are able to manage the crisis effectively often find opportunities in it that allow for further development. In this way, a recession can become a catalyst for change and new growth.
Information and awareness of the current market situation are key to developing a good strategy. The following documents can help you with this.
Strategy for times of recession
At Louder&Higher, we create a strategy for times of recession based on the Briefit method, which allows us to quickly and effectively identify key challenges. This process allows us to develop solutions based on data and market realities, which change dynamically during a recession.
- Information condensation – Briefit focuses on synthesizing key information into short, precise forms, which allows for a quick understanding of the essence of the problem. Instead of processing excess data, this process allows you to extract the most important indicators that have a direct impact on the future of the company.
- Scenario analysis – each strategy includes a set of plans for different scenarios. During a recession, it is crucial to anticipate not only the negative effects of the crisis, but also potential opportunities that may arise in the market, such as weakened competition or changing consumer preferences.
- Prioritization of business goals and activities – enables the concentration of resources on those areas that will ensure the company’s stability and growth prospects. Thanks to the Briefit method, companies can clearly define: the actions necessary to maintain financial liquidity, key investments in innovation, and costs that can be reduced without long-term losses.
- Dynamic optimization – Briefit is a tool that supports continuous analysis and strategy adjustment in response to new data and changing market conditions. When changes occur very quickly, special attention should be paid to the ability to modify actions in real time.
- Data-driven decisions – A crisis is a time when intuition must be supported by hard data. Briefit focuses on the analysis of financial, operational, and market indicators that enable rational decision-making. Monitoring them allows for early detection of risks and faster response to emerging threats.
With a good strategy, companies not only gain an action plan for times of crisis, but also tools to monitor the effectiveness of the measures implemented. This approach enables flexible change management and increases the chances of stability and growth even in difficult market conditions. If you need support in creating a strategy, talk to us!
