Last week, we invited Ian Whittaker, the founder of Liberty Sky Advisors and a specialist city analyst in the media and marketing technology sectors, to share his take on the macro-economic outlook – for the global economy, for consumer behaviour, and for advertisers – in a webinar chaired by Ebiquity Group CEO, Nick Waters.
Current macro trends
The world is currently a volatile, uncertain place, with war in Ukraine, the tail-end of COVID, and galloping interest and inflation rates causing high levels of media and consumer anxiety. But the overwhelming factor affecting the global economy is rising U.S. interest rates, which the Federal Reserve has increased by 0.75% – an unprecedented three times in a row – in recent months, to stave off inflation. Higher U.S. rates cause ripple-out hikes in interest rates in countries around the world. In 2022, this has led the dollar to strengthen and major currencies to weaken, including the Euro, the Yen, and the pound.
To compound the effects of a stronger dollar, commodities are typically priced in dollars, causing inflation to spike faster outside the U.S. This has been painful in the Eurozone, Japan, and the U.K. to be sure. Commodity prices may now have peaked but the enduringly strong dollar will ensure that inflation continues to cause challenges right around the world.
The Federal Reserve and U.S. Government has been focused on keeping inflation in check at all costs for the past year, and inflation ranks as a top-two concern among voters. 76% of those questioned for a recent ABC News/Washington Post poll rated the issue “highly important”. But both institutions are not blind to the impact of high interest rates on the global economy and the banking system, and Ian predicts that U.S. interest rates will start to flatline after the November mid-term elections and start to potentially fall in 2023. This will likely have positive impacts on stock markets and funding available for the tech sector.
Elsewhere in the wider economy, the signals are mixed. Personal consumption is on an upward trend post the COVID-blip. Many consumers – particularly in higher-earning households – benefited from not spending during the pandemic and increased return on savings and asset values. What’s more, unemployment in many markets is at historic lows. There’s a lot of talk of stagflation, which is usually accompanied by rising unemployment. While unemployment rates may have benefitted from some retiring early during the pandemic, most companies have more concerns about the large number of vacancies on their books than the need to lay staff off.
Consumers – who’ve been supported by governments and employers in recent years – feel they have economic support. Companies are also accepting temporarily lower margins if it means they can push for higher revenues. They’ve realised that, with increased input (commodity) prices, there’s no point trying to slash costs and deliver unsustainable margins. They’ve passed on price increases to consumers who – despite global economic headwinds – appear willing to absorb these.
Five predictions for the near-to-medium term
- “Market knows best” is over. We have reached the end of the 40-year consensus that the market knows best, an era characterised by Reaganomics and Thatcherism on either side of the Atlantic. COVID has shown economies, economists, and citizens that governments are able and willing to spend serious money to protect and support their citizens. This is a trend that started with the 2008 financial crash and the bail-out of banks, was accelerated under COVID, and is gaining popularity.
- Globalisation is in retreat. Global free trade, globalisation, and “just in time” manufacturing is coming to an end. Nations, economies, and trading blocks have come to favour security over efficiency. This, too, was driven by COVID, and has been accelerated by both the effects of the war in Ukraine and that conflict’s impact on spiralling inflation caused by spiking energy prices.
- The West is pulling out of China. Many Western companies are doing less in and with China. This includes Apple making its latest iPhone (14) in India rather than China; Moderna choosing not to share the technology of its mRNA COVID vaccine with Beijing; and, AirBnB and many other tech companies pulling out of the country. The Chinese economy has not been as much of a boon as many thought, and major players are reorienting their focus on the U.S. and Western Europe, most conspicuously luxury brands.
- Polarisation to accelerate among consumers and in politics. Brexit and Trump were not one-offs. Recent elections in Sweden, Italy, and France have shown that the far right is far from unelectable, and hawkish, protectionist governments are here to stay. The polarisation of politics is also echoed in increasing differences in wealth between the haves and the have-nots, with pensions, asset, and housing values increasing sharply during and post-pandemic.
- Changing consumer mindsets. COVID has made many consumers reflect that they lost time during the pandemic and that, while they weren’t spending in 2020-2021, they’re more willing to spend and seize the day to live their lives now. This is reflected in a buoyant travel market. Consumers want experiences – their lives – back, and this is positive for both the tourism sector and brand marketing investment in this sector.
Implications for brands and advertising
Despite volatility, uncertainty, and rising commodity prices, low unemployment across the world is also matched by corporate margins sitting at record levels – 15% or more, the highest rates since the early 1950s. Although commodity prices are currently squeezing margins, it’s important to reflect that margins have nevertheless been running at historic highs until recently. This is likely to be very positive for the global advertising market, with brands prepared to invest helping brand advertising to grow at pace.
Brands that see advertising as intangible capital expenditure – and brand custodians able to talk the language of the CFO and make the case for sustained investment, despite uncertainty – will drive revenue growth over the months and years ahead. Experience of past periods of turmoil and recession shows that cutting ad spend in a downturn – taking a stop-start approach – is a false economy.
Ian also highlighted the following important structural forces likely to drive advertising investment in the years ahead:
- The ESG (Environment, Sustainability, and Governance) agenda – doing well by doing good – is increasingly important. Brands need to communicate their ESG credentials to benefit from their investment in this key point of differentiation.
- Following the lead of Procter & Gamble, the world’s biggest consumer goods business and the world’s biggest advertiser, there’s clear market acceptance that advertising builds brands and sales by increasing revenue and profits, which in turn translates to better long-term share performance. Where P&G leads, the market tends to follow.
- Data will become increasingly important to brands in more and more categories, particularly consumer goods and retail. In a post-cookie world, brands will increasingly hoard and make best use of first-party data and deploy data smarter as a strategic asset.
- The silos between traditional and digital media are breaking down. Press (national newspapers, magazines, and regional newspapers) and out-of-home advertising all generate more than 70% of revenue from digital versions of their media inventory. TV is a laggard, but there’s growing evidence that linear TV – still a strong delivery medium – will generate a larger and larger share of its revenue from digital.
Three grey swans for tech
Ian concluded his presentation by highlighting what he characterised as three “grey swans”.
- Big tech will come under increasing pressure from politics.
- Social media is in long-term decline.
- The winners in subscription video on demand will be tech players. Apple and Amazon have war chests of cash that dwarf those held by Disney and Netflix. They’ve also started to use that cash to buy content and sports rights, and this will put increasing pressure on Netflix – which, Ian believes, Microsoft will buy in the near future. You read it here first!
If you wish to discuss current macro trends, please do not hesitate to reach out here.
