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How will the coming recession differ from the previous one?

21 January 2020

5 minute read

How will the coming recession differ from the previous one?

In 2006, I had just graduated from College in the United States and got a job offer from Lehman Brothers, an investment bank - but I didn't accept it. Two years later, when Lehman Brothers crashed, my decision to go to Credit Suisse seemed validated. But the impact of the deep financial crisis left a lasting memory: With Wall Street in chaos, it felt like the whole world was crashing down. 

 

When is the next recession?

More than 10 years have passed since these colorful events, and I inevitably think, ‘When will it happen again?' 10 years is the longest period of stock market history without a financial crisis. It's hard to be very positive about the outlook. Geopolitical tensions, Trump's Tariffs, Boris's Brexit, and more uncertainties are plaguing the world economy. One of the strongest economies in Europe, the German economy contracted 0.1% in the second quarter compared to the previous quarter. Meanwhile, in 2019 the US treasury yield curve flipped, suggesting a recession could be on its way. Even positive numbers are a double-edged sword. The concern is that next year the economy may go cold.

The world is afraid that the next crisis will be the worst ever. Traditionally, interest rate cuts have been used to ease the recession and stimulate the economy by making money cheaper. But if interest rates are already down (or negative!), this tool is powerless.

It is not a question of whether there will be a recession but when it will strike. It is a multi-billion-euro issue that everyone is considering. However, FOMO ("Fear of Missing Out") keeps many in play. Withdrawing from the stock market too early may mean that you will lose out on higher gains. For example, before the financial crisis of 2000, the best appreciation occurred just before the bubble burst. I wish there was a crystal ball! Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund, predicts there is a 40% risk that the recession will hit before the 2020 US presidential election. 

Investment in technology will improve competitiveness

We cannot predict the future, but technology can help companies prepare for it. After the previous recession, companies cut back where they could. Then when the economy recovered, companies invested in digitalisation and technology rather than simply inflating their staff. By leveraging technology, leading companies have since streamlined their operations and automated routine work. These companies are now more agile, efficient and flexible than they were 10 years ago. Instead of wasting time with manual processes, people have shifted their energies to more strategic tasks. These same individuals are still using data and analytics in innovative ways to improve their competitiveness.​

Cost transparency and control in a recession is critical​

Sponsored by Basware, The Economist Intelligence Unit released a survey report​ of 400 purchasing and finance professionals. The survey found that 71% of respondents believe that finance and procurement have a strategic role to play in responding to changes in automation, digitalisation and commerce. If your goal is to streamline operations and control costs, the Purchase to Pay (P2P) process offers a great opportunity. ​

In a recession, transparency and accurate control of costs are particularly important. For example, the exponential indirect costs - those seemingly individually small and harmless, such as laptops, pens, toilet paper rolls - are considerable. Indirect costs can account for up to 20% of companies' total costs, and have grown at an annual rate of 7% from 2011, according to a McKinsey report​. 

An automated P2P solution allows data to be collected from different stages of the process and then linked together. The more comprehensive the data set, the better the opportunity to take advantage of advanced technology solutions such as artificial intelligence and machine learning.

Digitalisation is a flexible buffer for recession management. It is not a question of whether there will be a recession but when it will strike. The best thing businesses can do is prepare for the storm before it starts.

Learn how to handle a recession

Want to recession-proof your procurement and financial plan?  Download the EIU report to discover how more than 400 procurement and finance professionals are readying their organisations using automation and digitalisation. ­­