Currently, growth prospects for the world economy may seem weak. The war in Ukraine, the increase in energy, and food prices are just some causative factors. Another factor is the soaring inflation. This may make you want to know more about the world economy and the rising inflation issues affecting entrepreneurs. This post will discuss that.
Weak growth prospects of the world economy in 2022
You can read some highlights of the UN forecast on world economic growth below. It was prepared by the Global Economic Monitoring Branch of the United Nations.
Forecasts now project a world economic growth of only 3.1 percent in 2022. This is a downward revision from the earlier forecast in January. No surprise there. After all, major central banks are tightening monetary policy stances. In addition, the war in Ukraine seems to be intensifying. Furthermore, the fear of potential new waves of the pandemic is still there.
Incidentally, this downward revision is common for the United States, European Union, and China. Meanwhile, the European Union economy is directly hit by energy supply disruptions from Russia.
In the same vein, developing countries are generally projected to have lower economic growth in 2022 compared to 2021.
The effects of this global economic slowdown include the following:
- Food insecurity is likely to worsen.
- Similarly, poverty is likely to increase.
- There will be attendant increased borrowing costs for countries.
- Debt sustainability is likely to be undermined.
- Furthermore, the high prices of food
- Moreover, there is an attendant rise in inflation.
Rising Inflation Issues
Inflation is an indication of the additional expense for goods and services over a specified period – usually one year. Also, inflation refers to the rate of increase in prices of goods and services over a specified period of time. A good index for inflation is the overall increase in the cost of living.
It is the stated objective of every economy to combat inflation.
Causes of inflation
Lax monetary policies can cause long-lasting episodes of high inflation. The money supply grows too big as compared to the size of the economy. This leads to currency devaluation and a fall in purchasing power. Furthermore, prices begin to soar.
Supply shocks such as natural disasters and crises can disrupt production or raise production costs.
The Effects of rising Inflation on entrepreneurs
Understandably, inflation is of increasing global concern recently. Entrepreneurs are also bearing the brunt of the long-term effects of inflation and a worsening economy.
- First, inflation makes it more difficult for entrepreneurs to achieve profit margins.
- Second, businesses have to subsequently sell less since purchasing power is reduced.
- In turn, decreased profits lead to reduced growth and investment prospects.
- Furthermore, some entrepreneurs who began their businesses with their savings suffer significant financial risks.
- Besides, a shortage of supplies may lead to the reduced completion of production goods. Ultimately, this hurts the market. Your fund as an entrepreneur can become tied up in inventory-in-processes.
- In the same vein, the cost of borrowing increases. In other words, it can cost you more to obtain loans.
Tips for entrepreneurs to manage inflation
Optimize products and services
First, analyze your product streams for performance and viable options. Think geographical markets, distribution channels, and client types.
Maintain profitability
Second, you may shift your business production to higher-margin products. Do a good risk analysis before starting this.
Strengthen Product Pricing
Third, you can be proactive in strengthening product pricing. This can improve your competitive market position. Remember, you need to be transparent to your customers on this.
Protect your supply chain
In addition, protect your supply chain by diversifying your suppliers. Also, you can improve your inventory and storage processes. For instance, you can stockpile critical supplies with low holding costs.
Keep Cash
Finally, you can anticipate wage increases and higher prices. Ensure your receivables are collectible. Do not let your customers use your business as a bank. Rather, prioritize retaining cash and making sales.
The bottom line
The world economy and the rising inflation issues affecting entrepreneurs may lead you to wonder if inflation will ever stop. Actually, you have to deal with the reality of inflation. Using the tips here, you should be better able to manage inflation.
