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Insight, commitment, execution: How UK businesses can adapt to greater uncertainty

Tera Allas

Leads economic and business research on growth, productivity, innovation, technology adoption, and outcome measurement

The UK’s economic outlook has deteriorated in recent months and business leaders have been facing a number of ever-changing circumstances, which can make it difficult to plan ahead. Yet, such ambiguity, while disconcerting, can create opportunities for businesses to sharpen their competitive edge and find strategic advantages.

In this blog, I look at the key uncertainties facing the UK economy and illustrate actions that business leaders can take to navigate the turbulence. As summarised by my colleagues in a recent McKinsey Quarterly article—“Strategic courage in an age of volatility”—business leaders can adapt and thrive in in volatile times by prioritizing three critical areas: insight, commitment, and execution.

The uncertain UK economic outlook

Consumer confidence in September 2022 was at an all-time low.1 In its September 2022 assessment, the Bank of England estimated that the United Kingdom had already entered a technical recession.2 Annualised inflation recorded in July 2022 was the highest in more than 30 years.3 And the pound reached an all-time-low against the US dollar in September 2022.4

A sequence of changing domestic and international factors, including the impact of COVID-19, the war in Ukraine, and other events and market fluctuations, have ushered in an environment unfamiliar to most business leaders.

Such conditions can, in fact, be just as challenging as a negative outlook. Sometimes it’s easier to plan against a difficult, but more probable, scenario than make decisions when forecasts are vague and cover a wide range of possibilities. The following examples highlight the degree of volatility in the UK’s near-term economic outlook:

  • In the last year, the price of natural gas for delivery in January 2023 has traded between 120 and 880 pence per therm5
  • The inflation expectations for the year 2024 embedded in traded bond yields in the United Kingdom have moved between 2.7 percent and 4.4 percent in the last 12 months6
  • Market expectations of the Bank of England’s Bank Rate for October 2023 have risen from around zero at the beginning of 2021 to an average of 4.8 percent through September 20227
  • The Bank of England’s modelling suggests that there is a 90 percent probability that UK real GDP growth in 2023 could be anywhere between –2 percent to +2 percent8

These are big ranges. Exhibit 1 further illustrates how different independent forecasters’ projections for the United Kingdom have changed over time. In the first quarter of 2022, GDP in 2023 was still expected to grow between 1 percent and 2.7 percent, with inflation projections for 2023 ranging from 1 percent to 3.8 percent. By the third quarter of 2022, the forecast ranges had widened to suggest GDP growth of -1.9 percent to 2.1 percent and inflation between 0.9 percent and 12.6 percent in 2023.

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Insight, commitment, and execution to gain advantage

Often, a logical response to uncertainty is to shore up defences, “wait and see,” and hope to weather the storm. However, McKinsey’s research shows that there is an alternative, and potentially more advantageous approach. The most resilient companies are ambidextrous: prudent about managing the downside while aggressively pursuing the upside.

Building an insights edge by investing in detailed, in-depth and diverse perspectives can help business leaders see beyond the fog of uncertainty. The specifics for each company and sector are likely to be nuanced and highly granular. Nevertheless, I have outlined below three examples of possible insight-led opportunities in a downturn:

  1. A period of volatility and the potential materialisation of downside risks in corporate earnings is likely to lead to repricing events for financial assets, including equities. For leaders with a clear M&A strategy, this could create an opportunity to execute deals at more attractive prices.

    The impact of market fluctuations, has already been felt differently in shareholder returns across sectors, and divergent valuations are present within sectors, too. Refreshing a company’s strategic rationale for bold M&A could be a source of competitive advantage that outlasts the current economic perturbations. Historically, our research shows that companies that have taken a programmatic approach to M&A through the economic cycle have delivered excess returns relative to their counterparts.

  2. Let’s say you have a hypothesis that the wholesale energy price will stabilise by a certain point in time and that energy-intensive sectors that have already passed costs to output prices stand to gain from future moderation in input prices. Do you know which parts of your business this opportunity applies to? Are there ways you could lean into those areas more, before competitors do?

    At an economy-wide level the energy-intensity of products and services ranges from 0.1 percent in insurance and pension fund services to 10 percent in inorganic chemicals.9 Among energy-intensive sectors, some have passed through significant increases to output prices whereas, in others, margins remain squeezed. For example, between August 2021 and August 2022, output prices grew by 20 percent in chemicals manufacturing, but only 14 percent in food manufacturing.10 Only more detailed modelling could tell whether this implies genuinely favourable dynamics in chemicals—but the logic illustrates the kinds of analyses businesses could undertake to identify positive profit dynamics.

  3. Whatever the uncertainties, as wage growth trails behind inflation and interest rates rise on mortgages, it’s clear that household disposable incomes in the UK are under significant pressure. But not all households are the same, and not all product categories are equally exposed to drops in household incomes. Which of your customer and product segments could, in fact, grow in the coming 12 months? Are you proactively positioning yourself to win in these areas?

For example, the latest data from the Office for National Statistics suggests that women feel considerably more impacted by recent cost-of-living increases than men, and that the financial situation is particularly challenging for people aged 30 to 49.11 In July, around 30 percent of the population are “very worried” about rising costs and most people in this group were reducing expenditure across all categories, including food and essentials. In contrast, some 5 percent of the population said that they had made few changes to their consumption, except to save energy.12 Similarly divergent experiences and behaviours are manifest in McKinsey’s latest consumer sentiment surveys.

Our analysis of historical patterns in household expenditure also shows that the outlook for specific goods and services could be vastly different. Putting the unusual COVID-19 period to one side, consumption of staples—such as food and drink—is much less likely to reduce than expenditure on more discretionary items—such as recreation and hospitality. Even within broad categories, there are large variations: historically, households have tended to purchase more telecom services and more furniture repair services when incomes have stagnated. In contrast, spending on electronics and appliances has tended to slow significantly when household finances have been squeezed.

These longer-term patterns are also emerging in the most recent consumer expenditure data for the United Kingdom. As Exhibit 2 shows, at least as far as credit and debit card spending is concerned, people are moderating their overall outgoings across all categories. However, purchases of so called “delayables”—such as clothing, home furnishings, and sporting and gardening equipment—appear to have been most affected so far. “Social” expenditure on, for example, eating out, is also down, following a strong rebound after COVID-19 restrictions ended. The trends in social spending are, however, somewhat harder to interpret due to a combination of summer and bank holidays and changes in travel patterns.

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Such granular insights give leaders clues into how to position their business for the future. Often, however, the signals from data and analysis are still mixed. That suggests that committing to a pivot towards specific segments could be risky. However, without such commitment, companies are unlikely to see the benefits from their strategic moves. McKinsey research has shown that companies that reallocated resources more rapidly earned, on average, 30 percent higher total shareholder returns (TSR) annually than their slower counterparts.

Finally, it doesn’t matter whether times are volatile or stable, superior execution is always an advantage. However, in a period of uncertainty, companies’ ability to move quickly and decisively is particularly important. Research by McKinsey and the Harvard Business School found that companies that had launched agile transformations before the pandemic performed better and moved faster during the crisis and its aftermath than those that had not. Often, a key component of adapting to a rapidly changing environment was the fast adoption of digital technologies and processes, especially in the supply chain, in internal communications, and in customer operations.

The UK’s near-term economic and business outlook is far from easy to navigate. Yet, many companies during COVID-19 showed remarkable resilience and agility. There is no reason to believe that they can’t do it again.

This article was edited by Thomas Farrar, a manager of communications, based in McKinsey’s London office.

2. A recession is defined as two successive quarters of negative output (GDP) growth;
3. CPIH annual rate;
5. McKinsey analysis based on January 2023 futures contract between 6 October 2021 and 5 October 2022;
6. McKinsey calculations based UK instantaneous implied inflation forward curve as traded between October 1, 2021 and September 30, 2022;
7. McKinsey calculations based UK instantaneous nominal forward curve (overnight index swaps) as traded between January 1, 2021 and 30 September 30, 2022;
9. Energy intensity defined as consumption of energy-related intermediary inputs as a share of total output at basic prices; McKinsey calculations based on
11. McKinsey analysis of

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