13 May 10 Consumerism is Dead

Nothing like an attention grabbing headline. But it is a headline that raises serious issues.

Now that a pathway (of varying lengths and gradients, depending upon where you are located) is appearing leading us out of the Great Recession, a common picture of hope is emerging. The picture of hope is that, broadly, increasing consumerism and a ballooning middle-class in the emerging economies will save us all (or at least provide some of our industries with export markets)[1],[2]. At the start of the crisis we used to hope that the engine of perpetual growth (the Western debt-fuelled consumer) could be quickly restarted, but both the depth of the crisis and the damage to the banking system has put paid to that.  The picture of hope tells us that consumers in the emerging economies will fill the gap.

So, is the proposition that demand in the emerging economies will help drive global growth a realistic one? Well, there is evidence that it might work. As Geoghegan[1] notes, the middle classes in the emerging economies are due to swell from around 250m to some 1.2bn by 2030. But this is only one possible scenario, and one that largely relies upon the principle of ceteris paribus – fine so long as no other factors intervene.

An alternative view of global economic progress has been put forward a few days ago by Buiter[3], examining the medium and long terms effects of the sovereign debt issue that first raised its head in Greece. I will now attempt to summarise the main points made by Buiter:

1. It is not just Greece that is in poor shape. The whole of the developed world is affected, with arguably the exceptions of the Nordic States, Australia and New Zealand.

2. Of the developed economies, arguably the US is in the best shape although in about three years time it may have lost its AAA rating will be tested by increasing interest rates.

3. The austerity packages will have an impact on GDP – in Greece’s case a decline of about 6%. Default cannot be ruled out.

4. The emerging economies will continue to grow for one or two years and then the growth boom will turn to bubbles which will burst. At that point, some three years from now, we will have another global recession. The “bubble” issue is shared by others, for example Bowring[4].

Buiter’s message is that consumer demand wilts both in thedeveloped and emerging economies.

Buiter of course majors on the economic risk here. But there are other factors that we should be concerned about. The most notable of these is the issue of political risk in the emerging countries, a message flagged up both by Emmott[5] and Jaegar[6].

To conclude, forecasting the direction of the recovery in a globally inter-connected world is very, very difficult. There are far too many independent variables at play. The view put forward that the emerging economies, followed later by the US, will provide us with consumer-fuelled growth should be regarded as the “Golden Scenario”. Businesses must urgently consider at least one alternative scenario, where consumerism wilts and we enter an extended low growth environment. More of that here.

The immediate priorities are to:

(I)  Create a response strategy for each scenario supported by a central strategic plank that will succeed in both. You may well wish to consider other alternative scenarios too.
(II)  Set up an environmental tracking system so that management gets an early warning of which scenario we are headed towards.

References
[1] M. Geoghegan, “The Future Of Finance Shifts From West To East,” Forbes, Apr. 2010.
[2] D. Abney, “Tackling Tough Times and Delivering Results,” Knowledge at Emory, May. 2010.
[3] W. Buiter, “Sovereign Debt Problems in Advanced Industrial Countries,” May. 2010.
[4] P. Bowring, “Is China Headed for a Crash?,” The New York Times, May. 2010.
[5] B. Emmott, Rivals: How the power struggle between China, India and Japan will shape the next decade, London: Penguin, 2009.
[6] M. Jaeger, “The “Great Risk Shift” – or why it may be time to re-think the developed/emerging-markets distinction,” DB Research: Talking Point, Mar. 2010.

Tags: austerity, emerging economies, global growth, sovereign debt

08 Apr 10 Thoughts of an L-Shaped Recovery and Future Worlds

Overview
This post considers the implications of a long , slow L-shaped recovery in the developed economies. The outcome could be a divided world, with the developed economies split into two groups or blocs. In the scenario presented here, the lasting effects of the Great Recession are felt as seismic changes in both the political arena and consumer behaviour. There are material implications for businesses ranging from choice of markets, definition of customer segments through to sources of competitive advantage.

Introduction
The dominant thinking at the moment is that there is a real risk (at least in many parts of the developed world) of an L-Shaped Recovery, in other words, a protracted period, possibly measured in decades, of very low levels of economic growth. And all this will take place whilst the emerging economies power ahead.

The voices supporting this view include, for example, Butler[1] Johnson et al[2] and Wolf[3].

The arguments underpinning the L-Shaped “risk” range from (I) the high levels of national debt that weigh-down the developed economies[1],[4], (II) the real danger of another consumer-debt fuelled boom if confidence returns too quickly[3] to (III) the need for economies with a heavy dependency upon the financial services sector to return to a more traditional, export-led, foundation [5].

So, economically, what might an L-Shaped recovery look like? The National Bureau of Economic Research[6] is looking at a four-year recovery period for employment here in the UK – a situation that may well apply in other economies too[7].

The research arm of one major bank[8] is looking at GDP growth for the UK averaging 1.8% 2010-2015. And that’s the middle-ground scenario. The best scenario produces a six-year average annual growth rate of 2.4%, the worst scenario an average of a mere 1.4%.

The Carnegie Endowment’s scenario of the world order in 2050[9] points to relatively low average growth rates for the developed economies during the period 2009-2050:

UK 2.1%
France 2.1%
Italy 1.3%
Germany 1.4%
Japan 1.1%

The US does somewhat better in this projection, averaging 2.7% GDP growth, but all these projections must be contrasted with annual average growth rates well in excess of 5% over the next 40 years for India and China.

Other observers talk of the “W” – another period of economic contraction following an all too brief recovery. The new banking sector stress tests announced by the FSA[10] that factor in unemployment rising to 13.1%, give us a snapshot of the worst probable outlook for the UK.

With so many brains pointing towards, at best, a prolonged period of sluggish growth, we must ask the question “what will this mean for business?”

A conventional answer might be “belt tightening” and “preparing the business for real strong recovery – whenever it appears”.

But the implications of a slow, lumbering L-Shaped Recovery are far, far deeper.

The problem is that talking about the future in purely economic terms clouds our eyes and takes our attention away from what the real emerging issues actually are.

Two Elephants
I will argue that standing in the darkness, right in front of us, are two elephants. And we really need to consider, right now, the messages that these elephants bring for businesses in the developed world.

Elephant #1: The Political Scene
Both elephants are very closely related in terms of their DNA, but I will start with implications for the political environment. I will write here largely with reference to the UK, but the broad implications hold, I will argue, for most developed economies – including large swathes of Europe.

Some interesting research has been published here in the UK during the past few months that strongly indicates growing political ambivalence[11] on the part of the general public. In other words, a lack of faith or confidence in the established political parties.

Other observers[12] argue that the financial crisis has dealt a final death blow to the liberal views that have under-pinned both the western political establishment and the rush to globalization over the past decade or so[13].

There is already some evidence that support for new political groups is emerging.[14]. Some even say that communism could fill the space left by capitalism[15].

Without doubt a vacuum is forming. If nature abhors vacuums, we must ask what will fill it. Here in the UK we now face the real prospect of either a hung parliament or, at best a winner with the slimmest of majorities. Both outcomes would return us to a period of short-lived governments and provide, probably in two – three years time, an opportunity for new voices to fill the vacuum and punch above their weights.

But be under no illusion, this is not just a problem for the UK. As I have noted in an earlier posting, the developed economies are fragmenting into two groups – those that have weathered the storm in a reasonable shape (US, Canada and Germany for example) and those that emerged with higher levels of debt and a reduced level of public support for the necessary corrective measures[16], [17], [18] The so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain) come to mind, with the real risk of sovereign debt default[19].

But there could be other nations queuing up to join this club too.

It is in these developed countries, the real losers in the Great Recession, that the most fundamental of changes could be witnessed.

Rather than producing a united world, in this scenario, the Great Recession will have produced very much a divided world with the developed economies split into two distinct groups.

So, the ground is set for some major changes in the political environment in elements of the developed world. As an example, the long-awaited May election here in the UK could be the last to be dominated by three long-established parties. The landscape for the post-2010 election could be far different, with new entrants taking influential positions and, potentially, the place of one of the traditional “big three” parties.

Elephant #2: The Socio-Demographic Scene
All this brings me directly to the second elephant, which shares much of the DNA of the first.

In the final analysis, the shape of the post “Great Recession” world will be decided by the public, not economists’ projections, and the going will be challenging for the consumer during the L-Shaped Recovery:

• There is the prospect of a jobless or a near jobless recovery as developed economies face the challenges of industrial re-orientation and competitive employment pressures from those emerging economies that continue to power ahead[20].

• Getting credit will be difficult (as it will for businesses in this scenario). This applies especially in the UK where doubts have been raised regarding capital availability to fund a recovery[21].

• Social bifurcation becomes an increasingly significant issue in developed economies. In short, the gap between the “haves and the have nots”. This is again a notable problem in the UK where some areas have not yet recovered from the late 1970s recession, let alone the current challenge[22]. Some argue that the demise of industry and the rise of financial and professional services have only added to this divide[23],[24].

Again, we are faced with an emerging vacuum. The L-Shaped Recovery signs the death warrant for debt fuelled consumerism and everything that went with it. In the eyes of many, free markets and globalization will have failed to deliver. So again we have a question, this time “What will replace consumerism?”

When faced with the task of visualising the effects of a potential seismic shift, it is often helpful to look at a position that is the exact opposite of the one that we have enjoyed. So where could the pendulum swing towards? John Quelch of Harvard Business School[25] got part of the way there when he talked of the importance of experiences and personal contact replacing material purchases, but the real opposite of consumerism is valuism, a term that I will loosely define as an environment where individuals focus upon and gather around guiding moral principles and standards of behaviour. Perhaps Adam Smith had a glimpse of this writing some 200 years ago when he referred to the solid virtues of “prudence, restraint, industry, frugality, sobriety, honesty, civility, and reliability”[26].

A concern for values and moral standards replaces a concern for material displays of wealth and assumptions of unbounded growth.

Some implications
The product of the Great Recession could be significant changes in the political landscape and consumer behaviour in parts of the developed world. So what are the implication of the L-Shaped Recovery scenario for businesses in these economies? Well, here are some thoughts for starters, contrasting what we have been used to what an L-Shaped Recovery presents:

If “consumerism” and “debt” were the words of the last decade, “values” and “security” will be the words of the next.

But this is just one view
To conclude, it is important to note that it is impossible to predict the exact course that the global business environment will follow. We are still in uncharted waters.

In times of change it is best to consider several views, or scenarios.

Remember that the L-Shaped recovery is just one picture. Others are more hopeful, pointing towards the prospect of a sound recovery[27] and resilient political systems that can weather all storms[28].

So plan for a minimum of two worlds, not just one.

References
[1] E. Butler, “The boom and bust,” Adam Smith Institute, Mar. 2010.
[2] S. Johnson, P. Boone, and J. Kwak, “Get Ready for an L-Shaped Slump,” Peterson Institute: Real Time Economic Issues Watch, Dec. 2008.
[3] M. Wolf, “The world economy has no easy way out of the mire,” FT.com, Feb. 2010.
[4] U. Dadush, “The Future of Europe and the Euro,” Carnegie Endowment, Mar. 2010.
[5] A. Posen, “The Path of True Recovery Is Never Smooth,” Peterson Institute, Oct. 2009.
[6] C. Reinhardt and K. Rogoff, “The Aftermath of Financial Crises,” The National Bureau of Economic Research, Mar. 2010.
[7] H. Shierholz, “A massive jobs gap,” Economic Policy Institute, Mar. 2010.
[8] S. Hayes, “The Economic Outlook and the Risks of a Sterling Crisis,” Feb. 2010.
[9] U. Dadush and B. Stancil, The World Order in 2050, Carnegie Endowment for International Peace, .
[10] B. Masters, “Turner orders tougher bank stress tests,” FT.com, Mar. 2010.
[11] S. Wilks-Heeg and D. Ellis, “The state of a politically ambivalent nation,” OurKingdom, Mar. 2010.
[12] S. Zizek, First as Tragedy then as Farce, Verso, 2009.
[13] Y. Hatoyama, “A New Path for Japan,” The New York Times, Aug. 2009.
[14] P. Giddy, “MPs WANTED: FOR CRIMES AGAINST DEMOCRACY,” OurKingdom, Mar. 2010.
[15] N. Lezard, “First As Tragedy, Then As Farce by Slavoj Žižek,” guardian.co.uk, Oct. 2009.
[16] C. Caldwell, “The Weekly Standard,” The Weekly Standard, Apr. 2010.
[17] G. Andrews, “Italy still unable to see beyond Berlusconi,” FT.com, Apr. 2010.
[18] “Greeks take to the street over austerity plans,” FT.com, Feb. 2010.
[19] W. Munchau, “Greece will default, but not this year,” FT.com, Apr. 2010.
[20] R. Freeman, “What Really Ails Europe (and America): The Doubling of the Global Workforce,” The Globalist, Mar. 2010.
[21] D. Smith, “Honey, I’d shrink the banks,” TimesOnline, Oct. 2009.
[22] Cities Outlook 2010, London: Centre for Cities, 2010.
[23] J. Manzi, “Keeping America’s Edge,” National Affairs, Feb. 2010.
[24] M. Brewer, A. Muriel, and L. Wren-Lewis, “More unequal – but why?,” Institute for Fiscal Studies, Dec. 2009.
[25] J. Quelch, “The Next Marketing Challenge: Selling to ‘Simplifiers’ — HBS Working Knowledge.”
[26] Y. Levin, “Recovering the Case for Capitalism,” National Affairs, Jan. 2010.
[27] D. Bowers, “Corporate recovery could take investors by surprise,” FT.com, Mar. 2010.
[28] Z. Davis and T. Carothers, “The Economic Crisis and Democracy: A Year Later,” Carnegie Endowment, Mar. 2010.

Tags: consumer behaviour, developed economies, emerging economies

31 Mar 10 The B3 – The new face of globalization?

Markus Jaeger makes an interesting observation in his article The Great Risk Shift[1] noting that the Great Recession has had another unexpected outcome.

In summary, the terms “developed economies” and “emerging economies” are now anachronisms – part of the vocabulary of the pre-Great Recession world that are now of limited value. Jaegar’s main point is that the by-product of the Great Recession has been to produce new economic groups – or blocs – each with different risks that are yet to be fully recognised. The so-called emerging economies (that we should really re-label as the emerged economies), have now demonstrated their fiscal stability and therefore present a reduced risk of a sovereign debt default. However such economies do, the article observes, still face political risks.

Critically, a sub-group of the “developed economies” (most notably the so-called PIIGS[2]), have emerged with an increased debt burden.

So, looking towards the future shape of the economic world, we could be concerned with three blocs (the B3 in the title):

Bloc #1 as I will call it, represents those developed economies that have weathered the storm with, for the time being, their credit risk profiles intact. Obvious members of this category include Germany, US and France.

Bloc #2 represents the emerged, and now in most cases, decoupled economies of China, Russia, Brazil and South Korea that have come through with generally low government debt to GDP ratios.

Bloc #3 is a new club with a potentially expanding membership. These are the former developed economies that have fared the worst and come out of the recession with increased debt levels. These countries face a challenging future and could be, in relative terms, in long-term decline. There may be other “developed economies” that could join this club.

Jaeger suggests that each bloc faces different risks.

Arguably Bloc #1 is best positioned, followed by Bloc #2 where political risk replaces the declining risk of sovereign debt default.

Bloc #3 is the most interesting in view of increased debt levels. In future postings I will argue that in certain scenarios these countries could face volatility on the political front too.

Certainly, the “bloc” concept is an interesting way to perceive where the power to reshape the global economy will come from as it focuses upon potential groups of influence rather than individual countries. In the new post-Great Recession world, “countries” too could become an anachronistic term when considering where power really lies.

Notes
[1] M. Jaeger, “The “Great Risk Shift” – or why it may be time to re-think the developed-/emerging-markets distinction. See Illustration for the G3.,” DB Research: Talking Point, Mar. 2010.
[2] Portugal, Italy, Ireland, Greece, Spain.

Tags: emerging economies, g20, sovereign debt

17 Feb 10 The Post-Great Recession World: Four future views

Introduction
A new term has entered our vocabulary, “The Great Recession”. A period of turmoil and shock that started, at least publicly, with the demise of Lehman Brothers on 15 September, 2008. Whether of not we are still in the grips of the Great Recession depends largely on where you are located.

But before the Great Recession I would argue that we (at least those of us in the so-called developed economies) broadly assumed two things:

(1)That globalization would continue, unchecked, and bring wealth to all.
(2)That the emerging economies, including China, would eventually come around to accepting Western-based definitions of capitalism and eventually democracy.

The Great Recession has done more than just economic damage, it has brought these two fundamental assumptions into doubt. Great doubt.

Global businesses have been built on the back of these two assumptions. Now that these assumptions are crumbling, we need to look carefully at what the future post Great Recession business world might look like.

The purpose of this post is to start building a framework for seeing what forms this future world might take.

Two competing perspectives
In the years immediately before the Great Recession, the business world appeared to be largely separated from events on the global political stage. Despite conflicts in Iraq and Afghanistan, the pace of globalization and the spread of capitalism seemed just to accelerate, reinforcing the view that the world would gradually accept democracy and a Western-based form of capitalism.

Now things have changed. Capitalism’s credentials are tarnished.

We have now entered a period when events on the global political stage will be, I propose, the major driving force for change. Now traditionally accepted drivers of change, such as technology and even climate change, will pale in significance.

Interestingly, an article in the current issue of International Affairs[1] can help us to identify the range of possible outcomes that we could face. Professor Buzan concentrates in this article on the future of international society and I will attempt to summarise the propositions and conclusions here. I will also add some of my own inferences too.

The broad question to be answered is:

Can a global society that is made up of a number of different cultures develop and unify in a stable manner?

Interestingly, there is no clear answer to this question from the literature examined in the above article and this observation therefore demonstrates that globalization is currently very much in untested waters.

If we look at the literature in this field, there are two broad views as to how international society (i.e. globalization) could develop. The first view (called Vanguardist), assumes that to provide stability, an international society has to accept a common culture or set of values. For globalization to progress peacefully, we need to accept some common cultural norms. If we do not have these shared cultural values then international society will only be weakly integrated. The emergence of common cultural values is now required to encourage the onward march of globalization. If it doesn’t appear, then things could get unpleasant.

The second view (called the Syncretist view), assumes that different societies can co-exist and can in fact rub along quite well together, learning from each other in the process. But even within this apparently benign approach there are potential problems. These problems appear as societies progress and change from natural states (where power is centralised and there is very limited tolerance of those who don’t want to comply) to what Buzan describes as open access societies. Open access societies are where power is spread to all. I would suggest that a good example would be Europe, with its particular emphasis on a society that stresses the rights of the individual.

The problem is that natural states can find a move to open access societies quite threatening:

But since the transition from natural state to open access order remains difficult and dangerous, resistance to this mix in natural states is perfectly rational.

And Buzan goes on to provide an example:

The great experiment in China, where a natural state has, up to a point, embraced the market, hangs in the balance: will the market destabilize the natural state or enable it to make the transition to an open access order?

So, even taking the more benign Syncretist view, we could be in for a bumpy transition.

Importantly, Buzan ends the article by proposing four potential paths and I have applied my own labels and commentaries here:

Scenario 1: One World
This scenario is based on the Vanguardist view – that globalization requires one unifying dominant culture. This is a world where we see a resurgence of capitalism, possibly fuelled by a rapid and sustained job creating economic recovery. Here we see a progressive spread and acceptance of Western-based definitions of capitalism and business practices. This also is a world that evolves peacefully into a series of liberal open access societies.

Scenario 2: The G4
This is a world where different attitudes and approaches are shared and respected.  Capitalism evolves to embrace the views of the emerging economies (the G4 in the title refers to the US, China, India and Brazil as being the dominant influencers, but there could be others). Again, progression and absorption takes place in an orderly manner.

Scenario 3: The Jigsaw
I have used the title from one of my earlier scenario sets to describe this outcome. Here, divisions appear, especially as the economic and political power of the West declines and a vacuum appears. Disparate economic recovery rates with Asia forging ahead and the West foundering introduces tension.  A series of new iron curtains descend. Protectionism rises.

Scenario 4: Flash Points
This represents a complete breakdown with different cultures exaggerating their differences. Communication deteriorates at the international level and conflict ensues.

These four future worlds are illustrated below:

Four Future Worlds

My future writings will expand upon this scenario set and the business implications. As a first step, my next major posting will focus upon the implications of the emergence of the mooted “L” shaped recession.

References
[1] B. Buzan, “Culture and International Society,” International Affairs, vol. 86, 2010, pp. 1-25.

Tags: capitalism, economic damage, emerging economies, future world, global businesses, globalization

23 Jan 09 Recession and Strategy: Tracking the path to a new world.

In my January 2009 Executive Briefing I argue that we are dealing with far more than a recession.  We are on the edge of a tipping point where the business world will probably undergo the biggest shift that we will witness in our lifetimes.

If we thought that in the mid 1990s the emergence of the Internet was a tipping point for business strategy, then what we will witness is a wholesale earthquake.

My position is that the current recession (in the developed economies) and slowdown (in the emerging economies) is not the end game.  The recession is a catalyst to a new world.  The twist is that nobody knows for sure what the new world looks like.  If you read the above briefing you will see that I put forward four different scenarios or snapshots of what the new world could look like:

Broadly, the two scenarios on the left assume a relatively short recessionary period and we then return to life very much as it was back in 2007. In “Focused Change” we see some new regulatory activity to reduce the systemic risk in the banking sector. In “Globalisation Ahead” we see the BRICs (the emergent economies of Brazil, Russia, India, China) emerging to take a dominant role on the world stage – China and India in particular win through.  However, even these two optimistic scenarios have their downsides for developed economies.  For example, this recession has brought under the spotlight the fragility of financial services led economies (like the UK’s).  Even in the optimistic scenarios these sectors shrink – so what will fill the employment gap?

The two scenarios on the right are even more challenging and assume a further banking crisis and failure in a major employment sector – e.g. automobile manufacturing.  The outcomes could go two ways – globalisation does continue but the emerging economies assume a position of global influence faster than has been previously envisaged.  The result could be the decline of the primarily US led definitions of “Capitalism”.  New views appear as to which is the “best way”.  In “The Jigsaw”, the final scenario, we see the emergence of protectionism and effectively the death of globalisation.

I use two shaping events to track the possible trajectory of change – where we are going – industry contagion and global co-operation.  Using views on where these shaping events are going, we can form an indicative view of where the world is going.  My personal view is shown below and it can be seen that we may be rapidly approaching the Rubicon, or the point of no return:

I will be continuing to track and comment upon the trajectory of change in this blog.  If you would like to received the underlying working paper describing these propositions in more detail please click here.

Tags: banking crisis, business strategy, emerging economies, globalisation, recession, recession strategy, scenarios