What is the Outlook for the Economy and the Receivables Finance Industry? Is There Light at the End of the Tunnel?

Faced with fears of a recession, businesses must look to partners and alternative sources of financing to meet the challenges

Author: Luiza Buserska, Corporate Communications Executive at CODIX

The world economy is facing a number of turbulent challenges. Inflation that is higher than seen in several decades, tightening financial conditions in most regions, the war in Ukraine and the ongoing austerity measures against the COVID-19 pandemic, especially in China, all weigh on the outlook.

The price spike (raw materials such as oil, gas, food and metals), the waves of refugees, the disruption of financial and trade channels for cooperation increase the uncertainty for business.

Barely resurfaced from the bottom to which the pandemic and the economic crisis sent them, now the companies are facing new dangers. In the current situation, there are hardly any businesses that are not worried about further deepening problems and even recession. In this situation, small and medium-sized enterprises are particularly vulnerable. The above-mentioned issues are inevitably taking their toll and are the catalyst for business managers to consider revenue diversification and working capital opportunities.

About a third of the global economy has faced several consecutive quarters of negative growth. Global growth is forecast to slow below 2% in 2023. This is the weakest growth profile since 2001, excluding the global financial crisis and the acute phase of the COVID-19 pandemic, and reflects significant slowdowns for the largest economies. Global inflation is expected to peak at 4.5% to 4.75% in January 2023, remain at this level and gradually begin to decline in 2024. At the same time, regional differences are expected to increase in the future due to unequal monetary and fiscal policies and unequal opportunities to support economies in individual countries.

Also, larger shocks in energy and food prices could cause inflation to be contained longer. A global tightening of financing conditions could trigger widespread debt distress in emerging markets. A gas cut by Russia could depress production in Europe, and new global health fears could further slow growth. Geopolitical fragmentation also means retarding trade and capital flows.

Against this background, in an effort to reduce inflation, central banks have dramatically increased interest rates, pushing the global economy closer to recession. For most sectors, inflationary pressures, rising rates and a looming recession are associated with a number of challenges, including pricing and contract updates, higher costs, as well as supply chain delays and staff shortages. Many of the companies are unable to withstand the pressure and are forced to declare bankruptcy.

Right now, SMEs, and even larger market players, have an urgent need to ensure flexibility and find alternative sources of funding to meet their immediate needs, pay staff and meet the expectations of their customers. Companies are facing an expected deterioration in their ability to service their debts, and for this reason, in an effort to reduce risk, banks are increasingly tightening controls and lending criteria for businesses of all sizes. Therefore, more than ever, companies need a partner who can provide them with flexibility and quick access to financing, taking into account the specifics and needs of each business. This will help companies not only survive, but even take advantage of potential opportunities for development and modernization as they arise. Right now, the factoring industry can prove to be very useful by lending a hand to improve the economic climate.

It remains to hope that possible downturn may not be as severe as initially expected. According to experts, if the European Central Bank (ECB) stops aggressively raising interest rates, then a good opportunity and a ray of light can be expected in the second half of 2023 for the economy and financial markets.

Data show that for the United States, very little growth is expected in 2023 – between 0.5% and 1%, as is the forecast for 2024. For Europe, and especially for the Eurozone, a potential slight recession can be expected in the first six months of next year, but then a return to economic growth. For emerging markets with stronger central banks and better monetary policy flexibility, as in Latin America, better results can be expected. For 2023, the outlook for China has also been revised upwards, especially after the easing of Covid measures and if the economy opens up. Of course, it can be assumed that countries and regions that are self-sufficient in energy will have an advantage.

Both national economies and businesses are now looking for security. It is expressed in the diversification of production, shortening the transport route, finding alternatives for supplies and new financial sources. This is now being realized as a strategic priority.

In this climate, when companies are trying to survive, it is of great benefit to be able to get quick and adequate financial support, saving you the slow and clumsy traditional procedures for credit approval. The latter depends on many factors – sometimes the decision is delayed due to approaching the end of the fiscal year or waiting for the results of an ongoing audit.

Ultimately, the unpredictability of the current geo-political and economic situation requires lenders to also have the flexibility to be responsive and provide predictability for business owners, providing the tools they need to operate with confidence and an eye to the future.

For now, it remains to be seen what will be the behavior of the central banks and whether they will soften the previous aggressive policy of raising interest rates, which has its impact on the economy on a global scale and which will give an impetus to development. But the very fact that economies are currently withstanding aggressive rate hikes not seen in decades means they are stable enough. This gives reason to expect, after some delay, especially during the winter months, a ray of light at the end of the tunnel, both for the economy in general and for the receivables finance industry in particular, especially towards the second half of 2023.

This article was published by BCR, the leading provider of news, market intelligence and training for the global Receivables Finance industry: TRF News, December 2022.

The article was featured also in the February issue of FCI In-Sight Newsletter, 2023.