Global economic outlook: strategies to thrive in a new normal

Global economic outlook: thriving in a new normal

To succeed, business leaders must adapt to the realities of a new normal in several key areas:

• Economic activity:  While demand drivers had dictated the pace of growth from the 1990s through the 2010s, supply conditions will play an increasingly important role driving economic activity. In a supply-fragile world increasingly influenced by political and geopolitical factors, economic desynchronization will likely be a key feature of the outlook. Regions and sectors that previously shared common business cycles may suddenly be exposed to diverging forces, forcing business leaders to consider the broader ecosystem in which they evolve.
  
• Talent: The value (and cost) of talent has increased post-pandemic, with business leaders having struggled to hire, train and retain during a period of elevated churn and tight labor market conditions. Given the investment in labor, we foresee ongoing labor preservation efforts, with business leaders increasingly focused on how to manage costs via greater process efficiency and stronger productivity growth via the adoption of new technologies like generative AI (GenAI) as well as wage growth compression.
• Inflation: While the global disinflation process will continue into 2025, structural factors will likely lead to inflation being a few tenths of a percentage point higher than central banks’ targets over the next five years. The five Ds of structurally higher inflation are demographics, debt, de-risking, decarbonization and digitalization. Aging populations requiring more private and public spending, elevated levels of public spending for domestic and industrial policy, a growing focus on de-risking and building resilience in a geopolitically fragmented world, the greening of the global economy via greater outlays to reduce carbon emissions, and capital investment to develop GenAI will likely push inflation structurally higher.
• Central banks: Easing inflation and slower economic momentum will push central banks to ease monetary policy gradually over the next couple of years. Still, given lingering fears of cyclical inflation resurgence and the reality of structural upside inflation risks, central bankers will favor a careful and measured easing of their policy stance in the coming years. Barring a pronounced economic slowdown, we anticipate policy rates will converge toward levels higher than at any time since before the global financial crisis of 2007–2009.
• Fiscal policy: Elevated levels of debt and pro-cyclical budget deficits are concerning, as they will lead to increasing government funding costs, moving otherwise productive government investment away from social programs, defense, climate and digitalization toward interest payments on the debt and increase financial stability risks. We anticipate the new normal for fiscal policy will have to balance the populism-driven desires for greater social spending along with governments’ industrial policy aspirations against markets pressures pushing for fiscal consolidation.
• Geopolitics: Geoeconomic fragmentation has grown since the onset of the US-China trade dispute in 2018. With cross-border trade and investment flows slowing, there is a growing risk of rising cost pressures, reduced productivity and slower efficiency gains. Industrial policy is likely to catalyze reduced competition in certain sectors while preventing gains from specialization and global economies of scale. Meanwhile, the growing influence of geopolitical swing states and smaller players seeking to challenge the status quo will likely create a more complex geopolitical multiverse.

Four strategies for business leaders to thrive in a new normal 

To help thrive in the new normal, business leaders can adopt the following four strategies:

1. Reimagining the enterprise: Transform the enterprise by learning from past crises, regularly refreshing strategies, and adapting portfolios to the changing economic and geopolitical landscape. Focus on making labor, supply chains and technology practices more resilient and adaptable to new supply conditions and geopolitical influences.
2. Accelerating investment in innovation: Invest significantly in GenAI and other transformative technologies to build the enterprise of the future. Stay ahead of technological advancements, manage higher structural inflation, and align with global trends in decarbonization and digitalization to improve efficiency and reduce costs.
3. Embracing agility: Develop flexible planning processes that can quickly adapt to various economic scenarios and market conditions. Implement dynamic pricing models and stay informed about geopolitical developments to adjust strategies effectively. Consider the broader ecosystem and the impact of economic desynchronization on different regions and sectors.
4. Enhancing profitability: Focus on reducing costs and improving process efficiencies to fund future transformations. Optimize financial operations through strategic decision-making and divestitures if necessary. Balance fiscal policy pressures with the need for productive investment in social, defense, climate and digitalization sectors. Adapt to geoeconomic fragmentation by diversifying markets and supply chains.

These strategies help ensure resilience, innovation, agility and profitability, positioning businesses for growth despite the uncertainties of the new normal.