Law firm executives contending with fresh economic uncertainties can look to some reliable indicators to gauge how recent unforeseen shocks could affect their firms in 2022.
Historically, real GDP and levels of activity involving initial public offerings and mergers and acquisitions have correlated to law service demand. So, although the true impacts of Russia’s invasion of Ukraine will not be understood for a while, law firms can try to find clarity by monitoring oil prices, inflation and interest rates, understanding how they have affected GDP; and by following whether the sharp decline in IPO and M&A activity continues.
How oil, GDP and law services are interconnected
Real GDP growth historically has been highly correlated to demand for law services. Law firm executives, then, are right to ask how economic sanctions and increased energy prices will affect economic growth.
RSM Chief Economist Joe Brusuelas forecasted the impact of the Russian invasion of Ukraine using three different scenarios. Although the U.S. economy is less sensitive to movements in the price of oil than it was 20 years ago, an increase of energy prices still creates a drag on the economy, estimated at a decrease of 0.15% GDP over the intervening 12 months with every $10 in price per barrel of oil.
To put this into perspective, the economy is well positioned to withstand a 10% shock to price of oil, but a 40% shock would subtract 1.5% from U.S. economic growth for the following 12 months.
Therefore, we recommend that law firm executives adjust demand forecasts accordingly to proactively mitigate the effects of a decline in demand for services, estimating the impact to be relative to GDP.
IPO and M&A activity and the law services for it
Most law firms have experienced strong overall demand growth and profitable years through the pandemic, driven primarily by real estate, corporate, and M&A practice areas.
The war, however, has disrupted global IPO and M&A activity, which in 2021 was up 40% over the previous year. Since the invasion began on Feb. 24, North American IPOs have dwindled 93%—from $24 billion a year ago to $1.7 billion—in in the same period this year, according to Bloomberg.
Although there was year-over-year demand growth in almost all practice areas from 2020, comparisons to pre-pandemic growth rates are not nearly as promising.
According to Thomson Reuters, corporate, real estate and M&A are the only practice areas that have recovered and grown since before the pandemic. A major disruption in IPO and M&A activity will certainly affect demand for legal services throughout 2022, and law firm executives must monitor this activity closely and adjust forecasts accordingly.
Continue to monitor
Although there are no certainties in the current geopolitical environment, there are economic factors that law firm executives can watch carefully in order to forecast and mitigate impacts to their firm. By monitoring oil prices, GDP, and IPO and M&A activity, law firm executives will have more insights on overall law service demand in 2022.