Outlook 2005: Integrating Cost Control and Revenue Growth

As global growth slackens in 2005, sustainable improvements in real economic value will require a better balance between the cost-control techniques companies honed during the downturn and the top-line growth strategies they developed in the recovery.

Corporate balance sheets for 2004 reflect the absence of clarity in the current recovery and, in many cases, businesses' piecemeal, ad hoc approach to cost control and top-line revenue growth, the twin paths to greater profitability. Corporations that binged on spending at the close of the last decade moved into purge mode during the 2001 recession and 2002 slowdown. In most sectors, companies exhausted their ability to restore profitability through cost reductions in 2003, and they reinstated strategies for top-line growth this year. But revenue improvements will become more difficult in 2005 as global growth slows and upward pressures on costs reappear. The economic forecast for next year includes moderately lower U.S. and global GDP increases, higher interest rates, rising inflation, and lower profit margins. The International Monetary Fund (IMF) has revised its earlier forecasts downward and now puts world output growth at 4.3 percent for 2005, down from an estimated 5 percent for 2004. Sluggish domestic markets in the United States, Europe and Japan and slightly slower growth in the developing nations will coexist with higher commodity prices and financing costs. The second half of 2004 foreshadowed the lower-growth terrain that lies ahead and outlined the new terms for success in a distinctly chillier economic environment.

The IMF expects U.S. GDP to grow by 3.5 percent in 2005 -- down sharply from its earlier forecast of 4.3 percent -- with inflation at 3 percent, driven largely by higher commodity prices. The Federal Reserve and most of the other G7 central banks have already signaled that they will likely increase interest rates over the next 12 months.

For U.S.-based companies, sustainable corporate growth in this phase of the cycle will require an integrated approach to cost control and top-line objectives. The new economic parameters for 2005 will also require rapid globalization in order to expand cost advantages and exploit new markets.