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The myth of a major economic crisis on the doorstep

Leading economists are divided in the likelihood of a soon-to-arrive recession or economic breakdown.

Some predict either one could occur as soon as 2020, others are timid about the timing, and finally others predict it won’t happen at all. However, one thing is certain: executives across industries increasingly adopt risk-averse behaviors.

According to recent studies, 33% of executives fear that a slowing economic activity will be the main obstacle for their company’s growth. 93% of the same executives forecast strong economic growth – with 76% expecting growth rates from 6% to 15% for the year 2019. While the contradiction in this statistical overview is obvious, the question remains: What makes executives afraid of a potential economic crisis and hence display often an hesitation to engage in strategic endeavors?

In order to find the answer to this critical question, a look at classic measures of an economy’s health should give a valid hint on the direction.

One of the most expressive indicators is the variation year on year of the individual Gross Domestic Products (GDPs).

The growth rate outlook for real GDPs worldwide, conducted by the International Monetary Fund (IMF), reveals an opposite trend than one would expect for an emerging recession: There are positive growth rates for nearly all economies by region for the years 2019 to 2021.

Especially Asia Pacific (5.1%) and East Asia (5%) are regions with solid growth rates. North Africa is also highly emerging, with rates between 4.2% and 4.4%, followed by North America (around 2%) and Europe (around 1.7%). All that on the back of a record year 2018 where companies are still processing an order inventory often with lead times of 9 to 12 months

Real GDP growth - annual percentage change

The overall trend is positive and does not indicate an economic crisis or downswing at all. Hence, the question remains: What could explain decision makers’ contradictory talks and behaviors when classic indicators like the GDP don’t show any sign of a crisis?

Cyclical economical swings are not the answer.

There are three main reasons that could give answers to this presumption and influence perceptions: the current political environment in a global perspective, technological innovation’s influence on the economy, and the inequality of global wealth distribution within society.

Trade disputes dominate global politics, punitive tariffs cause political and economic insecurity.

From Brexit to the media-exaggerated trade war between the US and China – in these days, there are many reasons for decision makers in large organizations, politicians and employees to worry about the global economy. Should there ever be an economic crisis, it will be complicated to counter it by bringing together all countries in order to implement a unified action plan.

The emerging “quid pro quo” attitude is leading nowhere, so is the increasing application of punitive tariffs, which fuels further escalation in the ongoing trade dispute. Also, the likely upcoming Brexit – with or without a deal with the EU – creates uncertainty for businesses and consumers. The uncertainty if a Brexit will happen is about as disruptive as the event itself.

As a result, decision makers are more and more hesitant when it comes to investments in Ginnovation, global business development or hiring talent. This affects the world economy on a long-term basis.

Innovation has always been a major driver of economic success – with patents as measure. Nowadays, start-ups lead in innovation due to lean, agile, quick-to-market processes – without patents being filed.

Measuring innovation today takes more than just looking at the numbers of patents filed or investments in R&D. To get an accurate view of innovation, ideas and services have to be measured by observing business models and entrepreneurial start-ups.

Executives of large organizations across industries learned that and are increasingly trying to gain access to innovation by investing into start-ups, technology or by creating incubators for these emerging companies.

With the booming digital era, technological innovation becomes tightly linked to people and objects being increasingly interconnected – through the Internet of Things (IoT), data collection businesses, blockchain.

Hence, a particular event in a completely different industry will have instant consequences for a company’s business due to the interconnected set-up. Thus, executives are increasingly cautious as they fear being impacted by another industry’s issues.

With that, they limit their opportunities to grow their business in the digital era and evolve into new markets. These days, former leaders of innovation need incubators to be at the pulse of innovation, get access to new technologies and implement them into their operations. Because innovation is an increasing condition for technological maturity – that’s where many organization lack in.

Improving economic equality globally would support the implementation of a healthier economy – leading to a better understanding of the global economic environment, and thus, to the reduction of future crises’ magnitude.

The equality of global welfare in society should be more taken into account when measuring economic health. Global wealth, namely real GDP growth, is not an accurate enough indicator as it does not comprise wealth distribution within the society. However, there are indicators that exist and that measure economic equality, e.g. the Gini Coefficient, which is used by the United Nations (UN) and the World Bank. This number between 0 and 1 takes into account the distribution fairness of income, wealth and equity within a country’s population – 0 representing a full distribution society and 1 an unequal state.

 

Lately, the US Gini Coefficient was at 0.41, while Germany, France and the UK were respectively at 0.31, 0.32 and 0.33. The lowest Gini coefficient is awarded to Ukraine (0.25), while the highest coefficient goes to South Africa, with 0.63. By reducing the inequalities which result in unhealthy social competition, governments would consequently reduce chronic stress – hence increasing their population’s wellbeing.

A practical example is Bhutan, that introduced a happiness index which measures the success of the government administration’s activities. As an eye-opening result, during the same period the happiness index rose, the national GDP of Bhutan rose similarly.

This indicator is quite useful for specialists to complete the picture given by real GDP growth, when considering developed countries. It only changes by decimals of percentage points for these countries, while it remains an accurate indicator of economic health for poorer ones– where food, shelter and clean water remain important issues.

A recent example how inequality of wealth can separate societies are the rainforest bushfires in Brazil: The populistic Brazilian government declined foreign help with the argument, that if they would accept support, they would then been forced to stop their slash-and-burn activities as these pollute the environment. As a result, so the argumentation, Brazil would not be able to aim for economic success as major economies such as Europe and the US achieved by applying similar environmentally stressing methods over decades.

The current unstable political environment, innovation’s fast pace and global economic inequality give good reasons for executives – as much as for anyone else – to be worried about the economic situation as-is and economic development.

Following pseudo reasons for a major economic crisis leads to unnecessary instability of the own business, loss in market shares and thus creates insecurity.

However, as a matter of fact there is no fact-based evidence for an economic crisis to arrive soon. On the contrary: as growth rates of global GDPs show, economies are in good shape and will continuously grow in the upcoming years.

Hence, executives and decision makers should focus on a robust global business development, solid, future-ready process frameworks and the implementation of innovation strategies to improve and/or maintain competitive edge in their industries.

Dear executives, please beware of joining the circle of “decision makers being afraid, because decision makers are afraid”.

The challenge will be to “captain” your companies into a future where certain key indicators play less of a role, dynamics have changed, consumers are connected and have a stronger voice – voting with their feet – and innovation becomes even more the key to prosper.

It will take an increasingly strategic foresight to steer your ship through an unchartered sea.

IAC Partners is a global strategic consulting firm that helps clients to prepare for the unexpected.

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