It’s getting choppy…

Silvan Mifsud is director of Advisory at EMCS Tax & Advisory

Last week, it became official that the US economy contracted in the first quarter of 2022 mainly due to a record trade deficit, notwithstanding a strong domestic demand. This was an abrupt halt as the U.S. economy grew at a robust 6.9% pace in the fourth quarter of 2021. The decline in the US GDP in Q1 2022 also reflected a slower pace of inventory accumulation by businesses due to supply-chain disruptions and worker shortages. Domestic demand in the US remained strong not only in Q1 2022 but also in April 2022 . However this strong US consumer demand seems to be now losing momentum as the Federal Reserve aggressively tightens monetary policy to combat inflation, heightening fears of a recession. U.S. Retail sales fell in May, with consumer confidence hitting a 16-month low in June 2022. This could mean that the US economy could contract even further in Q2 2022, technically pushing the U.S. economy into a recession.

Back to Europe and fresh from the news, Germany has just registered a $1bn trade deficit in May 2022 — the first since 1991. Germany the country known for strong trade surpluses as its export manufacturing has traditionally driven the country’s economic growth and made it the powerhouse of the EU economy, has now ended up importing more than exporting in value.

As the Chancellor himself admitted “the crisis won’t pass in a few months because Russia’s war in Ukraine has changed everything, and supply chains are still disrupted by the pandemic”.

The sanctions imposed on Moscow by western countries have also hit trade, along with China’s coronavirus lockdowns, squeezing demand for goods from Germany’s export-focused economy.

The net result is that Germany Imports increased 2.7% to €126.7bn in May 2022 while exports fell 0.5%t to €125.8bn, meaning that Germany’s trade surplus has now evaporated, thanks to soaring import costs, mainly energy related and a drop in exports. Prices of German imports rose more than 30% in the year to May — reflecting soaring energy and commodity prices — while export prices rose almost 16% in the same period

The end result is that there is a high probability that Germany and the rest of the euro area will enter an economic recession this year.

The writing is on the wall. You need to make sure that your business is ready to survive the next economic downturn. Some tips below:

1. Regularly assess the health of your business.
2. Re-adjust your products and services to meet consumer demands.Consider introducing loyalty programs to deliver more value.
3. Re-adjust the use of all internal resources, including HR to increase efficiency.
4. Make sure your business is led by an open minded efficient team and remind them that you appreciate them. You need to communicate and listen to them now more than ever before.
5. Never stop thinking about how you can accomplish numbers 1-4 better and more efficiently.