Economic Slowdown or Slow Recovery

What Is Economic Slowdown or Slow Recovery?

Economic slowdown or slow recovery describes a downturn in the economy that affects the ability of customers to buy products or services, which in turn affects the supply and demand of those products or services. Downturns can happen because of global events such as the 2008 mortgage crisis or the COVID-19 pandemic or local events such as geopolitical volatility or productivity issues.

Why Is Economic Slowdown or Slow Recovery a Top Risk for Organizations Today?

At a high level, uncertainty related to the length of an economic slowdown will push an organization to take a defensive position and focus on controlling its liquidity, expenses and workforce.

Some of the side effects of an economic slowdown include:

• Slowing or disrupted revenue streams. As businesses move to protect their balance sheet, their spending habits change. Likewise, if consumer spending slows, revenue could be affected.
• Supply chain disruptions. Any suppliers of parts and materials affected by an economic downturn might result in a production slowdown. Consequently, it may become more difficult or expensive for organizations using suppliers to deliver their end products, thus affecting their cash flow.
• Financing issues. As revenue streams are disrupted, cash reserves become critical to meet financial obligations such as repaying creditors. At the same time, new financing becomes more difficult to access as lenders become more risk-averse, tightening cash flow further.
• Labor and staffing considerations. Organizations could be forced to take cost-cutting measures, including cutting staff. It can be a formidable challenge to navigate job cuts while keeping remaining employees motivated.
• Globalized impacts. As technology enables more businesses to extend their reach, either operationally or via supply chains, the effects of local economic slowdowns become more far-reaching.

Why Is Economic Slowdown or Slow Recovery a Top Risk for Organizations in the Future?

Economic slowdowns happen roughly once every decade, and there is little reason to believe this long-standing trend will change. While organizations are used to contending with heightened levels of volatility, other macroeconomic trends—an aging workforce, greater climate change impacts, and broader use of artificial intelligence—are expected to create even more economic uncertainty.

Some industries can suffer from economic downturns as others flourish. The rise in remote work has had a significant effect on commercial real estate and surrounding retail areas. According to a July 2023 Financial Times article, in the UK, average office lease lengths fell to a record low and office vacancies reached their highest level in nine years, creating the potential for a wave of defaults on commercial building loans. This could affect the banking industry and beyond. Organizations may be concerned that a new trend may emerge that could lead their entire industry into a decline.

How Can Organizations Mitigate the Impact of Economic Slowdown or Slow Recovery?

• Increased cash reserves and/or a modified capital strategy. Increasing the levels of cash on hand can help organizations mitigate the risks of an economic slowdown by making sure their financial obligations are met if revenues decline. Organizations with higher levels of liquidity could also take advantage of a potentially favorable acquisition landscape or prioritize investments in innovation and new-product development.
• Workforce planning. Establishing strategies in advance can help minimize workforce disruptions during economic downturns. Skills assessments and job architecture planning, for example, provide organizations with detailed insights they can use to identify opportunities to reskill or deploy employees to other, more productive areas.
• Increased focus on interconnected enterprise risks. During volatile or otherwise unfavorable market conditions, the impacts from cyber, reputation, supply chain, regulatory and other enterprise risks can create knock-on effects that could compound losses for an organization.
• Diversification. From changing investment strategies to switching supply chains and customer bases, diversification can help organizations withstand the vagaries of economic slowdowns and slow recoveries.

General Disclaimer
This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent, or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss caused by reliance on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.