MY predicts 'positive GDP expansion' but agency leaders are still bracing for recession impact

The year 2022 has been a rocky one, especially with a recession looming. The International Monetary Fund's (IMF) MD, Kristalina Georgieva, told Reuters earlier this month that the global economy's outlook had "darkened significantly" since April. She also could not rule out the possibility of a global recession next year. In fact, IMF even downgraded its 2022 forecast for 3.6% global economic growth for the third time in 2022.

While the possibility of a recession is indeed alarming for companies that have been weathering the headwinds of COVID-19 the past two years, Malaysia's economy was reported to have grown at its fastest annual pace in a year during the second quarter, Channel NewsAsia said, adding that this was bolstered by expansion in domestic demand and resilient export. More specifically, GDP in April to June jumped 8.9% from 2021. This growth was faster than the 6.7% growth previously predicted in a Reuters poll and a 5% year-on-year increase in the previous quarter.

Finance minister Zafrul Abdul Aziz also previously played down concerns about a recession in the country. He explained that Malaysia had seen "strong preliminary growth numbers" for the second quarter of this year, the New Straits Times reported, adding that the government is predicting "positive full-year expansion in GDP in 2022" as a result of the economy reopening. He added that the country will continue to be on track to realise a 5.3% to 6.3% growth this year.

Meanwhile, Malaysia's total trade jumped 21.3% year-on-year to RM231.44 billion in April this year, marking the 15th consecutive month of double-digit growth, NST reported. According to senior minister and international trade and industry minister Mohamed Azmin Ali, exports grew 20.7% to RM127.49 billion while imports grew 22% to RM103.95 billion. The Asian Development Bank also predicted in April that Malaysia's economy is expected to grow at 6% this year and moderate to 5.4% next year. That said, given the turbulent nature of the economy these days, it might not come as a surprise should a recession hit Malaysia.

While a few global clients are beginning to be cautious in the second half of the year, probably with directives from their headquarters, GroupM Malaysia's CEO Chanchal Chakrabarty told A+M that it has not seen the majority of its clients revising their marketing budgets downwards. In fact, certain categories such as aviation, travel and leisure, financial services, and retail, for example, have seen a significant pick-up this year and are continuing to be so. 

Nonetheless, Chakrabarty said outcomes expected from the budgets could become higher and additional business performance metrics could be added for more stringent accountability.

Similarly, Naga DDB Tribal's CEO Kristian Lee said that while the majority of marketing budgets under the agency's purview have mostly normalised to pre-pandemic levels, these budgets have also been stretched out across a more complex marketing mix as consumer journeys constantly evolve to become increasingly intricate.

He attributed this to the development of new platforms and mediums made readily available at the disposal of marketers today. "Many marketers, rightfully so, are finding themselves in a state of constant trial to determine their respective best practices in the search of marketing results and effectiveness," Lee explained.

Too early to be reducing ad spend?

The impending recession might be daunting for some companies and could possibly cause them to hit the panic button early and slash marketing budgets. Tech and social media companies are also feeling the heat. Snap, for example, recently missed its Q2 revenue and explained that there is increasing competition for ad dollars that are now growing more slowly. Meanwhile, Twitter also partly attributed its recent revenue dip to ad industry headwinds associated with the macroenvironment.

Meanwhile, GroupM's "This year next year" 2022 mid-year global forecast cited the consequences of the war in Ukraine, additional global supply chain disruptions associated with pandemic-driven lockdowns in China, ongoing input cost inflation, and higher prices for consumers in several parts of the world as several issues faced by the world's largest ad markets.

Despite Malaysia's finance minister playing down the possibility of a recession, Tan Kien Eng, CEO of dentsu Malaysia, said the writings are on the wall, with interest rates rising, the cost of energy, raw materials, and basic essentials rising, as well as a weak Ringgit, and rising country debt. At the same time, the continuous impact of digital transformation and automation whilst creating new job opportunities is also driving down employment rates across some functions. He added that the shortage of labour in "3-D jobs" - dirty, difficult, and dangerous - is also impacting the cost of services and delivery of goods, impacting the opportunities to cater for demands for business growth.

However, it is still too early for advertisers to reduce ad spend as the market is merely starting to pick up post-pandemic. He is of the view that brands need to make up for their absence over the past two years due to the pandemic and the over-investment in precision targeting by continuing to be present to their audience across multiple media touchpoints or risk being forgotten.

Certain sectors such as the property market with surplus inventories need to fight harder for a small pool of customers. Meanwhile, other sectors such as automotive need to better manage brand and customer experience for the delay in deliveries due to the shortage of materials caused by the lockdown in parts of China and the Russian-Ukraine war. "If you study the history of marketing and advertising, brands that continue to spend will triumph over brands who reduce or stop spending during hard times when the market rebound," he said.

What are agency leaders prioritising?

Although the current generation might have learnings of the past to refer to, such as the Asian Financial Crisis, the dot com bubble, and The Great Recession, society should not always assume that what was effective the previous times would work again in this current day and age.

"We should not get complacent and assume whatever worked a year ago would still work the same now," GroupM's Chakrabarty said. In fact, it is even more important to keep an open mind to the next and the new in this dynamic, ever-changing landscape, he said, adding: 

Explore, test, and learn.

He also believes in the importance of ensuring that employees are taken care of and that leaders are highly empathetic towards their needs and challenges. According to him, this is also the time to grow collaborations between multi-function teams within client organisations and with partner agencies. Doing so would facilitate diversity of ideas and help optimise the marketing investment which Chakrabarty said is the first to come under pressure. "In volatile times, it stands to improve overall process efficiency and marketing ROI. 

The need to constantly adapt to changes was also an important lesson Naga DDB Tribal drew from the past two years. Lee said it showed the team how they can never be comfortable and also highlighted the importance of continuous investment in tech and talent. "We also were given a reminder that we have to constantly place importance on good financial management in tandem with pursuing new sources of revenue," he said. 

Hence, should a recession were to occur in Malaysia, Naga DDB Tribal is bracing for impact by projecting cash flow pipeline. Lee explained that forecasting appropriately will enable the agency to plan for negative scenarios which may unfold. "For agencies, it is essential that we first and foremost secure our topline for the foreseeable future. From there it will be up to us to manage our bottom line accordingly," he said. 

At the same time, the agency is also prudent with its cost management as it attempts to be more efficient in how it operates. "Prioritising our areas of spend helps us to make better decisions financially. Our utmost goal and our obligation as an employer to our talent is to ensure that salaries get paid above all else," he said. It is also important to surround the leadership team with senior talent that possesses sound business sensibilities. 

"Decisions to be made during difficult periods are made harder and therefore it helps to have such individuals to assist the leader in making the best moves to ensure sustainability and perhaps even growth moving forward," Lee explained. That said, this year has been encouraging for the agency thus far, especially from a new business perspective, having been reappointed by KFC Malaysia and bagged new accounts including Luno Malaysia and Genting Skyworlds.

When it comes to cashflow, it is also equally important for agencies to diversify their client portfolio. According to dentsu's Tan, danger lurks for agencies with a single client or a small handful of clients because some industries are more prone to the impact of recession, such as housing and construction. On the other hand, the take up rate of lower cost and essential products, such as food and hygiene products, will continue and these are also perceived as necessities. 

It is risky when agencies over-rely on particular clients, especially when the client contributes more than 20% or 40% of the agency’s revenue. In this instance, the impact is greater when the client reduces spend. Diversity in portfolio will help to even out the risk in the short and middle term.

Shortage of skilled labour

The issue of talent remains as a recession looms. Aside from cost management measures, agencies also need to have a talent pipeline strategy in place to hedge against any risk to business continuity for clients, Sue-Anne Lim, Trapper Media Group's CEO, said.

"We have a problem in the labour market, which obviously impacts domestic production and consumption," she said. According to her, the agency wants to ensure that good talent stays and are motivated and continuously remunerated well. "We will brace for a lean team that’s highly efficient and effective and remove any agency process that does not impact the bottom line," she said.

Lim added that agencies should also stay clients to clients because marketing "will be very challenging for them" as price increases and margins fall. Trapper will continue to encourage clients to introduce innovative experiences to consumers and rejuvenate a sluggish market. Lim said:

Innovation in my opinion is the best measure against austerity.

Like Naga DDB Tribal's Lee, Lim also believes in ensuring a strong cash flow. The other two key areas agencies should also consider, according to her, are automating areas that should be automated and ensuring strong IT security. 

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