Thoughts of an L-Shaped Recovery and Future Worlds 1


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:

globalization trends

Economic trends
Political trends

Consumer trends

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.


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