Budgeting for an L-shaped recovery

VUWL.pngAs companies finalise Budgets for 2013-15, many will be thinking long and hard about the implications of the IMF’s new economic forecast:

“The recovery continues, but it has weakened. In advanced countries, growth is now too low to make a substantial dent in unemployment. And in major emerging market economies, growth that had been strong earlier has also decreased.”

This is a sad reflection on the failure of the policies followed since March 2009.

The reason for the disappointment is simple. As any business executive knows, demographics drive demand. But central banks and governments, with the exception of the Bank of Japan, continue to ignore this vital fact.

This is why the blog has co-authored ‘Boom, Gloom and the New Normal’. Its aim is two-fold:

• To provide a robust and well-researched alternative view of likely future growth prospects
• To support Boards and business managers in charting a new course to success and profitability

The key issue is that 297m people in the West will be in the New Old 55+ generation by 2015. They will be 31% of the population. Thus growth will inevitably be very much slower than in the 1982-2007 Supercycle years.

The reason is simple:

• When people are young, they need to buy new things
• And the Western BabyBoomers had lots of money to spend
• But now the kids have left home, and they don’t need many new things
• Instead, they mainly buy replacement products, and only when these wear out

Equally, the economies of the developing world now have to refocus on domestic demand, and away from exports to the West. Their populations are very poor by comparison with the West, so they cannot replace the lost spending there. These New Poor have money to spend for the first time in their lives, but their purchases also have to be both essential and affordable.

Thus the blog suggests that companies should budget for a continued L-shaped recovery. It first suggested this back in December 2008. Sadly, events since then have only confirmed its analysis:

• Originally it was widely assumed we would see a quick V-shaped recovery
• Then a U-shape was expected, as recovery seemed delayed
• Next a W-shape was forecast, as new stimulus would finally lead to recovery
• But in reality, there has not been a sustained recovery
• Instead, we have seen volatile markets, as stimulus ebbs and flows

Clearly central banks and governments still believe they will eventually return the world to the SuperCycle. But as the great scientist Einstein wisely remarked, a good definition of lunacy is to repeat the same action, and expect different results.

Far-sighted companies will therefore ignore the temptation to believe that the next stimulus programme will be different. Instead, they will focus on what they can do to insulate their business from the turbulence around them, by focusing on the key issues that they can control.

The good news is that almost nobody is producing goods and services for the New Old 55+ generation in the West. And only a few, like Nissan, are starting to manufacture affordable goods for the billions in the New Poor generation in emerging economies. Therefore competitive pressures in these two vast and growing sectors are very low.

These are the two great business opportunities of our lifetimes. The companies that now use the 2013-15 period to access these, will be building the foundations for decades of future success.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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