Business Organisation

Building resilience is the only strategy in times of recession

Recession? What recession? Well, whatever the White House thinks, the rest of the world is gearing up for another significant economic downturn… and the ostrich strategy of redefining ‘recession’ isn’t going to cut much ice when businesses’ global suppliers start shutting up shop. Christian Lanng, CEO and co-founder, Tradeshift comments

The war in Ukraine, China’s zero-Covid strategy, the lingering effects of the virus itself; all these and more contribute to the upcoming winter of discontent. And above it all lurks the spectre of inflation, with rates across the developed world climbing to levels not seen in decades.

Christian Lanng
CEO and co-founder

Reality bites

Tradeshift’s latest Index of Global Trade Health provides a valuable indicator of how external events impact activity across global supply chains. For the second successive quarter, the number of transactions between international buyers and their suppliers has dropped sharply – and across every region.

In fact, this decline was nearly uniform across most of the world’s largest economies: supply chain activity in the Eurozone and the US fell by five and four points respectively against the forecast range, while activity in the UK also slid a further five points.

Going a layer deeper into activity, order volumes give us a glimpse into where GDP could be heading in the next six months. There is no disguising it – the immediate future looks bleak, with order volume growth on the Tradeshift platform falling by a further six points against the expected range.

Waning orders are starting to filter down into the supply chain. Fluctuations in the number of invoices suppliers submit provide a further indication of how supply chains are reacting to demand signals from large buyers. Invoice traffic on the Tradeshift platform fell by seven points in Q2, the steepest drop in a year and the first time since lockdown that we have seen a fall of this magnitude across orders and invoices in the same quarter.

The slowdown in demand appears to be spread uniformly across different industries, with manufacturing, transport and logistics, and retail all struggling. Only the tech sector is (just) keeping its head above water.

The real crisis: labour

Our latest Index reveals that suppliers are not only experiencing a severe drop in orders; but costs are rising too. The average value of an invoice submitted on Tradeshift’s platform has increased by 11% since the start of 2022, compared to a more modest 3.5% rise in 2021.

At first glance, it certainly seems that organisations are practically helpless in the face of macroeconomic, geopolitical, and pandemic-related crises. If we look below the surface, however, we can identify the structural problems businesses can address to avoid the worst of this (and, even more importantly, future) economic downturns.

Much of the current bout of inflation can be pinned on factors such as the pandemic and Russia’s invasion of Ukraine. The impending economic storm could well blow itself out quite quickly. It would be wrong however to ignore the structural changes in the world economy that could mean high costs remain a recurring problem.

Obscured by war and pestilence it may be, but global trade is teetering on the brink of a historic inflection point, one that marks the end of the cheap and plentiful labour we’ve learned to take for granted.

Since the collapse of communism in Eastern Europe and China’s opening to the global economy in the 1980s, nations have enjoyed an almost unprecedented influx of workers. This however proved to be a double-edged sword: businesses got drunk on low-cost labour and neglected to invest in technologies that would reduce their reliance on heavily manual and labour-intensive processes.

The US provides a great example of how economies are suddenly having to adapt to a shrinking labour pool. In the 1990s, the working-age population in the US grew by roughly 1.3 million a year. In the coming year, the working-age population is expected to grow by just 400,000.

The Covid lockdowns that prevented the free movement of labour were thus only a foretaste of the new normal. And while businesses will always be at the mercy of global “events”, it is the deeper, structural issues like labour that will shape their ability to adapt to sudden shifts in demand, supply chain disruption, competitiveness on the world stage… and ultimately, their survival. That, at least, is in businesses’ own hands.

Resilience not revolution

Let’s be clear: businesses cannot automate their way out of recession. At the same time, adopting new technologies like robotics and automation is a proven way of building much-needed resilience that can significantly soften the impact of global events.

Germany famously did it after the second world war – and without the predicted strife in labour relations. Today, Germany has more industrial robots per capita than any Western economy, yet has among the highest proportion of young people in apprenticeships and a continued reputation for quality, craftsmanship, investment in employees’ lifelong learning, and harmonious industrial relations.

Countries like Germany and Japan show that automation is not about revolution, but resilience. Neither should these principles be limited to the factory floor. From logistics centres to finance departments, automation can be a catalyst for an economic transformation that results in more of the high-value, high-reward work people want to do.

It’s encouraging that automation, once viewed primarily to reduce overheads, is fast becoming a key component of long-term risk management and resilience planning across global supply chains. According to one recent study, 78% of executives plan to invest in automation to mitigate the impact of future labour shortages.

Will we ever defeat the boom-and-bust cycle, as one British government claimed to have done? That’s one for the futurists. For businesses today, it’s far more profitable to focus on what they can do to mitigate the next recession. Enhancing resilience is the only feasible strategy – and automation must play a central role.

Main image credit: Andriy Onufriyenko / Getty Images