When I wrote about the economic outlook in January, I acknowledged we were heading into choppy waters. The ingredients for uncertainty were clearly laid out: major elections affecting half the world's population, ongoing geopolitical tensions, climate crisis challenges, and lingering, although apparently improving, economic fragility.
Yet somehow, I remained cautiously optimistic going into the year. Perhaps it was because these challenges were visible on the horizon rather than emerging as sudden shocks. After all, the pandemic was now in our past, interest rates were expected to ease, and inflation showed signs of cooling in some sectors. The known unknowns, I reasoned, were apparent and could be planned for.
Forewarned is forearmed?
Now, as we approach the end of the year, I find myself questioning that optimism. Despite having a clear view of potential disruptions and chaos, most of us, I’d argue, have found 2024 more challenging than anticipated. This raises the question: why does forewarning not necessarily translate into better preparedness?
The numbers behind the numbers
The numbers tell a complex story. Take the UK's headline inflation rate of 1.7% – its lowest since April 2021. At first glance this is encouraging, but dig deeper and the picture becomes more complicated. While energy costs have decreased by 16% (in fact a correction after the massive hikes when Russia invaded Ukraine), this positive shift is largely offset by persistent increases in food prices, services, and particularly rent, which has surged by 7%.
Similarly, while average salaries in the UK have grown by 4.8% in the three months to September, the real-world impact feels distinctly less positive. For many businesses and individuals, costs continue to climb while revenues remain static or decline. This results in slower, more cautious spending, which ripples throughout the supply chain, creating a self-fulfilling cycle of economic slowdown.
Headlines vs reality
This disconnect between headline figures and ground-level reality creates its own form of uncertainty. When official indicators suggest one scenario while businesses experience another, which narrative should guide our planning? The aggregated data might show economic resilience, but individual sectors and regions often tell different stories.
This dynamic plays out predictably: uncertainty breeds conservative behaviour. Businesses postpone capital expenditure while maintaining essential operational spending. Consumers delay major purchases. Businesses and individuals hoard what cash they can as they wait for greater clarity and smoother waters. Yet knowing this pattern doesn't necessarily seem to help us navigate it more effectively.
Degrees of uncertainty
Perhaps the challenge lies not in identifying uncertainty, but in accurately gauging its cumulative impact. When multiple sources of uncertainty converge – elections, geopolitical tensions, environmental concerns – their combined effect often exceeds our expectations. It's like preparing for a rain storm while overlooking the possibility of a flood.
There's also a psychological dimension to consider. Our brains love patterns and certainty, and this could mean we underestimate the impact of known risks while overreacting to unexpected ones. This cognitive bias might explain why many of us, despite acknowledging potential challenges, still framed the year optimistically and constructed budgets that now seem overly bullish. We saw the storm clouds but convinced ourselves we could navigate through them with minimal turbulence.
Does the very act of identifying potential challenges create an illusion of control? Did you make similar assumptions? I'm curious whether your budgets for 2024 have aligned with reality, or if they've required significant revisions.
When the glass starts looking less full
For those who began the year with a glass half full outlook, has optimism given way to a more sobering reality? Conversely, did the pessimists among us potentially miss opportunities by planning too conservatively? The art of budgeting has always involved balancing caution with ambition, but this year seems to have tested that balance particularly severely.
As we look toward 2025, do we need to reconsider how we factor known uncertainty into our planning processes. Beyond simply identifying potential disruptions, should we be more systematic in assessing their compound effects? How can we make our budgeting processes more agile and dynamic, with regular recalibration based on evolving conditions?
Resolving the paradox of known uncertainty
After all, while we can't predict every economic twist and turn, we can perhaps become more adept at adjusting our sails when the wind changes direction – even when we saw the storm clouds gathering.
As published AccountingWeb - December 2024
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