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.

[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.

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