Its now 3 years since the Great Recession began.
US GDP is still below previous peaks, despite $5trn of stimulus spending and quantitative easing.
The position in the Eurozone is even worse.
China’s economy will be lucky to escape with a ‘soft landing’.
Policymakers seem to have lost the plot. They have forgotten, or maybe never realised, that demographics drive demand. Yet:
• 29% of the Western population are now aged 55+ and in the New Old generation
• China has lost 400m babies due to its ‘one child policy’ since 1978. These children are not now maturing and available to join the 25-54 cohort of Wealth Generators
What can be done to realign our thinking and policies to this Demographic New Normal? This is the blog’s 2011 Christmas Quiz question.
A failure to find the correct answer(s) will likely condemn countries to run deeper and deeper into debt, as policymakers try ever more desperately to return us to an economic SuperCycle that no longer exists?
The prize for correct entries will be a sustainable recovery in the global economy.
This will be based on Prof Michael Porter’s concept that “Shared Value will drive the next wave of innovation and productivity growth in the global economy”.
As promised, the blog looks today at the USA’s trade position in polyethylene (based on data for the January-August period from Global Trade Information Services, the leading global supplier).
The chart shows US net trade (exports less imports). This peaked in 2009 (green column), with net exports of 1.6 million tonnes. Volume had risen 69% versus the 2007 level of 0.97MT (blue). But volume in 2011 has been just 1.03MT (light blue), only up 6% versus 2007.
The main reason is an overall decline in export volumes from 3.3MT in 2008 to 2.9MT in 2011:
• Mexico peaked in 2009 at 734KT, but is 679KT in 2011
• Latin America has been volatile, but peaked at 771KT in 2008
• China peaked in 2009 at 585KT, but is 192KT in 2011
• NEA peaked in 2008 at 178KT, but is 107KT in 2011
• SEA has been volatile, but 2011’s 292KT is a new high
Meanwhile, net imports in 2011 at 1.85MT are equal to 2007’s 1.83MT. These come mainly from Canada, whose volume of 1.19MT in 2011 is also similar to 2007’s 1.17MT.
Of course, many Western readers would have expected the USA’s exports to have risen since 2008, not fallen. Its cost position has improved remarkably since then, due to its new source of advantaged ethane from shale gas. The reason is that many of its major competitors do not share its financially oriented approach.
As the blog highlighted last week, most emerging economies also prioritise social and political criteria, whereby employment and strategic geo-political issues have an important role.
The blog’s own research on China’s Sinopec demonstrates how it effectively operates as a utility, supplying raw materials to the factories to keep people employed. Employment is also a key driver for the Middle East and many other Asian countries.
This is why an understanding of Prof Michael Porter’s Shared Value approach is so important for the future. Western companies can no longer rely on the use of purely financial criteria to guide their strategy, as the world transitions to the New Normal.
Last week’s New Normal seminar in Houston continued the success of the Singapore and Frankfurt events. It sparked lively debate about the major opportunities for future growth in the New Normal. These include:
• The over-55 age group in the West – already 272m in number
• Those millions emerging from poverty in the East
One key discussion was around the different outlooks of Western companies, versus many of those in the Middle East and China. As the chart shows:
• Western companies focus on economics, with some input from politicians eg taxes, employment law. American companies in particular believe the Profit & Loss (P&L) account is the key driver of success
• This is not so true in the Middle East. Companies there have a focus on the P&L, but usually have close linkages to government, and are very mindful of social needs such as providing employment
• Companies in China start from a different perspective. The majors such as Sinopec are largely state-owned, and their prime role is to act as utilities, providing raw materials to the factories to keep people employed
These distinctions are now taking on growing importance. In 1980, almost all the major companies were Western in orientation, and focused on the P&L. But today, half of the Top 10 companies are from the Middle East and China. So their views matter.
This is another example of the power of the Shared Value concept. As Harvard’s Prof Michael Porter has argued, it creates the potential for “the next wave of innovation and productivity growth”. It enables companies to focus on long-term opportunities and not just short-term financial metrics.
There is no going back to the post-1980 Supercycle world. Companies who now adopt the Shared Value approach will position themselves for success in the New Normal.
The next New Normal courses are later this month in Singapore, and in London in December. Please click here for more details of how to join.
The 10000 readers who downloaded the blog’s first Budget White Paper in December 2009, ‘Budgeting for a New Normal’, will remember the issues highlighted in the triangle above.
At the time, they were being widely ignored, as policymakers assumed that the economy would soon return to its previous SuperCycle.
Today, this optimism has been revealed as wishful thinking.
Instead, much as the White Paper feared, we have learnt that “Extended downturns are difficult times. We would all like the certainties of future growth to return. And I believe they will in time, but probably not as quickly as the financial community currently expects. Disappointment is part of the experience of extended downturns.”
The lack of attention has meant these issues have since become worse. And they highlight how the world is now moving away from the economic certainties that dominated the BabyBoomer SuperCycle:
• Then, steady economic growth led companies to focus on financial targets. The Shareholder Value concept was widely adopted
• Now, we are relearning that businesses cannot ignore the impact of politics and belief factors, when they come to make decisions
• Politics has led to the current impasse over the Eurozone crisis, and to lack of US progress on debt market issues
• Beliefs have driven geo-political issues such as the Arab Spring to the top of the agenda
All this means that the world is becoming ever more complex. New concepts such as Shared Value seem likely to become the main driver for future economic growth.
Equally, forecasting the future now requires robust scenarios to be developed, rather than simple straight line forecasts. As the White Paper also noted:
“Harold Macmillan, the former UK prime minister, summed up this dilemma when asked once about “his greatest worries”. He famously replied, “Events, dear boy, events”. This might be a good watchword for all of us, as we progress through the uncertainties of the current downturn towards the ‘New Normal’.”
The blog will discuss these issues in more detail in its annual Budget Outlook, to be published on 22 October. On Saturday, as usual, it will review the performance of its October 2010 Outlook, ‘Budgeting for Uncertainty’.