A few short questions which will define Competitiveness in 2009, and beyond

by Professor Stephane Garelli

Director of IMD World Competitiveness Center

How long will the recession be?

As an indicator, the informal feedback from business leaders recently attending IMD events indicates a “wait and see” attitude until the summer. Some signs of recovery are expected during the second half of 2009 and stronger results will appear in the statistics of early 2010. As usual the stock exchanges will pick up earlier. After all, we cannot stay on a diet forever!

What type of recession?

An “ECG U type”! This means a rather long recession with some ups and downs (like a graph of an ECG of brain waves) and a few false starts during the lower part of the U and before the real upturn occurs.

Which country shall recover first?

The US, which was among the first to enter into recession, will naturally lead the recovery. Even if some regions of the world (China) experience some early growth, the one and only key and credible message that the worst is over will come from the US.

Which countries shall recover last?

Traditionally Germany, Japan and Switzerland are the last to recover. Their “structural rigidities” are higher than in most Anglo- Saxon countries and may explain why their economic cycle is usually delayed.

Do we risk a Depression?

The answer is no, for most countries, if a depression is defined as a 10% fall in GDP or a 3 years’ recession. However, Iceland and the Baltic States may be the exceptions to this rule.

Shall we have deflation?

Again in most countries, no (here the exceptions may be Britain, Japan and Spain). However, certain industry sectors may experience a severe drop in prices (e.g. automobile) across the globe.

Will the stimulus packages work?

The IMF estimates that these packages can be valued at $5,000bn, which represents the cumulative budget deficits in 2009 and 2010. In the industrialized world, people will save the money they receive. They live in a “replacement economy” (a new product replaces an old one) and they can delay a purchase for a certain period of time without experiencing a perceptible decline in their standard of living. In the emerging economies, people live in a “first buy economy” and they will not want to delay a long expected purchase. In this case, Keynesian policies will work and people will spend the money they get.

What about unemployment?

This is definitely a big issue. The International Labor Organization anticipates a 50 million
increase in world unemployment in the near future. Most nations will have a close to 10% unemployment rate, some (Belgium, Ireland, Russia, Spain, South Africa, Slovakia, Turkey, etc.) will unfortunately fare a lot worse. The cost impact on public finances will be huge. The temptation of protectionism will increase as the public asks, “Shouldn’t stimulus packages benefit and protect only domestic businesses?”

How to pay for massive government debt?

The US expects $2,500bn of borrowing requirements in 2009 and Europe $1,000bn. Obviously one way to repay the debt is to raise taxation on high earners (e.g. Britain with a marginal tax rate increased to 50%). As a consequence, tax havens will be under attack to prevent money from escaping higher taxation.

Will inflation kick in?

With the recovery, yes! It will be triggered by both an excess of money supply (especially dollars) and a rapid rise in commodity prices (essentially fuelled by the demand of emerging nations). Central banks will not react immediately so as not to impede recovery and also because inflation is an effective way to reduce the value of debt. Companies will learn once again how to manage an inflationary environment, for example, by moving from cash to more tangible assets.

Do companies still have some money?

Yes and a lot! It is estimated that the 100 top global companies have some $600bn in cash. This money will be used to buy back shares (to sustain price and to be better protected against hostile takeovers). Acquiring industrial assets and companies will also be a priority. M&A and market consolidation are back!

Who are the new investment bankers?

With some $6,000bn in currency reserves, emerging powers are the new big players and they will increase their weight in international organizations. In addition, sovereign funds, despite some losses, still manage some $3,000bn. This money will increasingly be used to finance infrastructure projects, to buy assets abroad and to finance the development of local companies and brands. They are the new investment bankers!

Will the dollar survive?

So far yes! 60% of the world currency holdings are in dollars, and many currencies are pegged to the dollar. In comparison, the holdings in Euros are only half as much while the Pound sterling and the Yen remain negligible. But the excesses in dollar supplies will sooner or later take their toll and the dollar will weaken. Several nations are already contemplating moving away from the dollar (for currency reference or commodity sales) to a basket of currencies. The Euro will attract more candidates. The Pound and the Yen will remain marginalized.

Who will ultimately gain power?

National governments of course! They have the ultimate power: printing money, making laws and setting taxes. The multilateral world is on decline (IMF, World Bank, WTO). It is again a brutal power game among the big nations. But beware: In the words of Thomas Jefferson: “A government big enough to give you everything you want, is also strong enough to take everything you have!