Phew, what a cauldron of a year 2022 was! Fifteen-year-peak in interest rate hikes, forty-year high inflation, tail risks from Ukraine and Taiwan and a looming recession. Wait! Is it still in looming mode?
At 2.3%, Personal Saving Rate is already at a 17-year low. Perched at USD 16.5T, US household debt climbed at the fastest annual pace since 2008, with ballooning credit-card balances and multi-decade high interest rates on them. Mortgage debt has been the biggest liability on household balance sheets. Americans are also tapping home equity to help meet spending needs. For the second consecutive quarter, home-equity lines of credit increased. BNPL is on track to clock a CAGR of 45% by 2030, with significant inroads in the grocery and travel segments.
The script for the rest of the season seems fairly well rehearsed. The Fed raises interest rates until the cost of capital along with consumption becomes costlier. Demand slows down and is suppressed. Workers lose their hold on the employment market in terms of wage rises; some, their jobs too. Providers forgo the lever on pricing due to sluggish demand and this brings prices and inflation down. And the cycle begins again as everyone starts dreaming of living happily ever after.
If this “soft landing” doesn’t pan out, activate Plan 2.0: steeper, prolonged catharsis featuring all of the above – only more intensely.
In ad tech too, the sentiment is sour for the year ahead, as captured by Octahedron Capital’s Ram Parameswaran. Unity avers that the declining trend in CPMs is due to the rise in the Fed’s interest rates and not due to the platform privacy changes. Hesitancy towards aggressive campaign spends is visible across its advertisers and the market for ads is witnessing a recessionary sentiment. Snapchat reported a widespread decrease in brand-oriented marketing spending across its partners in many industries leading to lower bids per action. Google has also reported a pullback in Search Ads.
In Content, the near lynching of Linear TV is proving to be advantageous to CTV stalwarts like Netflix. DTC companies have had to reckon with the grow-subscriptions-at-any-cost mindset that cost Disney dearly last quarter. Longtime CEO Bob Iger returned to the helm to staunch the collapse and script strategy for the road ahead.
The tightness in the labor market – due to a half-century low unemployment rate – is a saving grace in this sautéing of the economy. For sure, greenshoots have appeared through the foggy visibility since the fag end of 2022. Inflation growth has stagnated and is trending lower. In November, consumer prices were up 7.1 percent from a year before and 0.1 percent from the prior month, a slowdown from earlier in 2022. Checking account balances for lower-income families are still higher than they were in 2019. “Even with US households starting to eat into their savings, there’s still a lot of savings relative to before the pandemic,” says Beth Ann Bovino, the US chief economist at S&P Global.The tunnel will lead to the light.
So, what’s our take on where things are headed in 2023? Persistent inflation due to global supply chain crisis, contraction in GDP for two quarters and peak unemployment rate of about 6% in Q4. In eCommerce, an upsurge in Live shopping (including at Amazon), the rise of DTC and the use of AI in dynamic pricing mechanisms will be the trends to keep a watch on. Sync up your clocks.
Happy New year!
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