Glimmers of hope? Thoughts on the shape and feel of economic recovery

Recent news articles have stated that Germany and France have formally/statisticly exited recession (such as the BBC, on 13 August 2009 “France and Germany exit recession“). During the first half of 2009 equity market swings caused talk of ‘green shoots’ and whether they might be sustainable (Martin Wolf, Financial Times Talk of ‘green shoots’ has now been replaced by discussion of economic growth, albeit most projections showing it to be relatively small in the near-term.

For the last 18 months many people have talked about turnaround/recovery possibly occurring in 2010.  As we near 2009 year-end there is clearly hope, and some cautious optimism in the market that this might hold true, even if most seem to agree that there is still a lot of hard work to come and the pace of recovery might be slow (for example, the UK Treasury recently announced, here, that independent forecasts for FY10 have UK GDP growth at an average of 1.4%).

Market commentators are now talking about ‘the shape of the recovery‘, and using terms like ‘the new normal‘ to discuss how a looming economic recovery might present itself.  Can we have confidence that things are changing for the better?

Depending on where you look you might support, or challenge these views – one might consider business to be returning to normal when one sees the queues at airport check-in counters, contrary to the view you might have if you were to look at queues in job centers. Recovery, and the stage of recovery, seems patchy/uneven at best, both within countries and globally also. Furthermore, even within cities or economic regions, there will be companies that have weathered the storm, or dealt with the challenge, and who can move on and grow once again, while there will be others who continue to suffer, and struggle to deal with the consequences.

The ‘shape’ of the recovery

‘Small talk’ between business meetings often includes a discussion of the state of the economy, and how it is impacting business.  One topic that often comes up is the “shape” of the recovery.  In terms of increasingly pessimism, will it be “V-shaped”, “U-shaped”, “W-shaped”, “L-shaped”, etc. (described well by and e-commerce Guide). I recently heard one commentator comment on the shape of the recovery being like the Nike Swoosh (I suppose this is just a slightly more accurate version of the “L-shaped” recovery – steep decline, but long, slow recovery …). It can even be fun to consider other descriptions also – how about the ‘Toblerone‘ recovery (up and down for a while)?

At the very least, most commentators believe that there will eventually be a recovery (thank goodness!), and that it is only a matter of time when it will come. As I explain later, this doesn’t appear to be ‘blind confidence’ (for which I also say “thank goodness!”).

But what does “recovery” mean?

From recent experience, in my own firm, as well as in discussions with clients and friends, and what I read/see/hear in the media, there are now many business people who believe the future will however be very different to what we experienced in the past – ie, any recovery will not bring us back to where we were just before we entered the recession.

To that effect, I’ve heard the following said:

“We ‘re about to enter the New Normal”

“This is not business as usual”

“We can’t expect things to go back to 2007/2008 levels”

“Business will be harder”

“We have to sustain our leaner mindset, and not let ourselves revert to the times of excess”

“Business won’t return to usual”

“A new business agenda is emerging”

Much of what drives this seems not to be regulation, but rather a tougher, more pragmatic (possibly conservative) mentality.

From this, I see “glimmers of hope”. I don’t just mean that there may be an end in sight to the difficult economic times, which hopefully is true (although there are still structural issues, like Dubai and global imbalances, to deal with), but also that there may be a change in mind-set that ensures greater stability going forwards.

The FT article mentioned above included some tough statements, when written in April 2009:

“The danger is that a turnround, however shallow, will convince the world things are soon going to be the way they were before. … The world economy cannot go back to where it was before the crisis, because that was demonstrably unsustainable.”

It may be that people are starting to recognize this message.

Of course, many (and in some ways myself also) would have wanted a return to the more economic buoyant times that we saw in the middle of the ‘noughties’, but it is our ability to accept a more gradual, measured economic growth that will help us implement economic stability.

That doesn’t mean that companies, and individuals won’t be competitively aggressive – they will, and maybe even more so than ever before because the stakes have increased (‘win, or die’, whereas previously it was ‘who wins the most?’ in some sectors).

That said, such competitive aggression will, I think, be underlined by a new-found corporate maturity and experience. Nobody wants to again go through what just happened. Fingers were burned, and purse strings were tightened. Regulation might, however, be necessary in one or the other sector where the nature of transactions might not mean that this is fully adopted.

Something to be confident about?

As I said earlier, most commentators expect that there will eventually be a recovery, it’s just a matter of when and how. This confidence (which I stated as not being ‘blind confidence’) can lie in three things:

  1. The combined goal of most market players is economic growth – most processes are aligned to achieving this goal. Other goals, for the record, include, in some cases, employment maximization, environmental and ecological focus, however these don’t necessarily need to work against the goal of economic growth, and in some ways support it – cleantech opportunities, for example, are arising from increased environmental and ecological focus.
  2. Learning effects – there is a near universal desire to change, as mentioned elsewhere in this post, to do things in a way that we don’t go through again what we have just been through. We might not be able to entirely prevent future economic downturns (the next economic downturn might be driven by entirely different effects) but hopefully we will at least be more immune to effects that caused this economic downturn. Also, were we to try to prevent all future economic downturns we might eventually spend so much time protecting ourselves that economic growth would also be nearly impossible (like never stepping outside the house for fear of being hit by a bus – one simply can’t live life be being quite so risk averse).
  3. History/experience – since decent stock market reporting first existed, value growth has generally occurred over the long-term, despite a number of economic downturns (and even world wars, etc.). Of course, the past is not necessarily a guide for future performance, but it’s just one more tool to use, and anyway, there’s not much else to go on.

In summary, it seems that recovery is the only real alternative – were continued economic stagnation to occur in the longer term, then market stakeholders would continue to try out new, alternative policies, innovation, etc. until a solution were eventually to be found.

We’ve seen economies that have been through long periods of economic stagnation (perhaps one of the most recent, well-known cases was Japan, in the 1990s – the “Lost Decade”), but historical experience showed that some sort of recovery occurred eventually. In the case of Japan, we saw that the Lost Decade did indeed result in increased economic maturity (on consumer level frugality, thrift and saving). As the New York times pointed out in ‘When Consumers Cut Back: An Object Lesson From Japan‘, the danger is that this can go too far and result in deflation – it therefore seems that mid-term economic success comes from achieving balance – not too much, not too little.

It is clear that many market commentators (including, I suppose, myself) don’t want to risk looking stupid (or wrong) later on, by hanging their hat on a prediction of when and to what extent the recovery will occur. At best most commentators will hedge their predictions, and talk in more generic terms (eg, the “shape” of the recovery). The World Bank’s global economic outlook, ‘Prospects for the Global Economy‘, which was published in June 2009 and contains some very interesting views and debate, is a classic example of hedging:

[…] a number of indicators point to the beginnings of an economic recovery. […] Moreover, several factors point to continued weakness.

A more robust recovery is possible, […]. So too is a much weaker outcome.

The IMF’s interesting ‘World Economic Outlook (October 2009)‘ is slightly more opinionated, saying in its opening statement that “The Recovery Has Started, and the Challenge Is to Sustain It” (the IMF’s choice of use of capital letters!).  They do however go on to say that such recovery is at least partly driven by “measures deployed by the IMF”, so maybe they have an interest in wording their findings the way they do … For the rest of their executive summary they discuss the pace of recovery, and in the end also caveat their conclusion that “Downside risks remain a concern”.

Nobody has a crystal ball, and “the one thing you can be sure about any forecast is that it is wrong [if at least, only in it’s accuracy or completeness]” – that is, at the end of the day, perhaps what makes business interesting.

2 Responses

  1. Ha, the Toblerone recovery! Haven’t heard that one before.

    As much as I hate to say it, I think until the U.S. gets its act together, the recovery is going to be dampened. For all the talk of how the U.S. doesn’t produce anything anymore, we’re going a good job of exporting uncertainty around the world!

    I think in 2010, I think one of the biggest indicators of recovery will be the slowing of the flight away from the dollar. If the U.S. can at least dampen the rhetoric from China and others about the debt levels (and, perish the thought, we actually get a handle on it!), I think that will be a good sign of things to come.

  2. A joke, per Reuters, on Yahoo news:

    Q: What economic model correctly forecasts the outlook for the European economy? A double-dip recession, a V-shaped recovery, or something else?

    A: The bathtub. A steep decline, then a period of stagnation, then it goes down the drain.

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