I was recently asked to speak about global conditions at a McKinsey Forum in Washington, D.C. and then a few weeks later in a similar summit in Berlin.
These thoughts reflect about 15 years of thinking about global scenarios around the world. The future is not predictable, yet we must act in the context of some beliefs and expectations, of which mine have become largely optimistic of late.
So I said, more or less:
We are in a period of “Global Economic Warming,” – a general uptrend that will include some dramatic bouts of volatility to the upside and down. Those who anticipate and manage these factors most intelligently are going to come out ahead.
Animated by “Chindia” – roughly a third of the world’s population now growing at above double digit rates – the global economy will keep rising on a wave of increasing global trade and the applications of Internet technologies, the mass and momentum and inertia of which is not to be denied. (For sailors, “the wind is up,” but how hard do you want to sail through the night if you can’t completely trust your charts?)
Every unit of organization, from individuals to corporation, NGOs and governments of all kinds, will be challenged to manage volatility and take the right degree of risk (more is better, if you believe that risk and return are correlated.) But the challenge will be to protect against surprising developments in the social/political/business environment that can damage your brand, your business model or your capacity to continue. This means that you have to think hard about flexibility, adaptability, accelerating your speed of adjustment, and taking the range of steps available in the marketplace – both financial and informational - to protect against risk.
Change is being accelerated by communications at all levels. The developing Internet economy of ubiquitous information and connectivity gives more people more access to more ideas and to more markets than at any previous time in history. Take note of two billion cell-phone users, nine trillion emails a year, and a billion Google searches a day - more than half of those in languages other than English. In this context, individuals and organizations will be challenged to adjust their beliefs and operating styles to unprecedented transparency and openness. Whatever can be known, will be known. And information of every kind will continue to cross borders of all kinds despite the efforts of governments and cultures to stem the flow. (Just what does it mean that Google paid $1.65 billion for YouTube?”)
Increasingly powerful technologies will continue to become available at lower and lower prices (Moore’s Law has not been repealed) with power continuing to shift to the end user/consumer. The world will enjoy ongoing maturation and application/integration of all information/processing/connectivity technologies, leading to new discoveries and greater efficiencies, with emergent biotech and nanotechnologies, new materials and genetic engineering, promising new waves of industrial growth. This development is concurrently stimulating the rise of new info-tech users, new business models built on ever more sophisticated value chains and increasing sophistication of one-to many and many-to-many interactions. The growth of the online/virtual economy will become an increasingly added-value story in global growth, 2006-2016.
What makes the case now that “the wind is up” and likely to be sustained? Global expansion for 2002-06 is the strongest since 1970s, according to the IMF World Outlook. The volume of world trade expanded by 8% since 2002, fastest and most sustained since 1950s, according to Roger Cass, of Cass Research Associates. Global inflation and interest rates at 50-year lows and global liquidity growth is at historically optimal levels of 6-8 pct. The system has shown its resilience, with the attacks of 9/11 having less impact in terms of global output than Hurricane Katrina. China’s growth at 11.3% and India 9.3% are driving broadest based global expansion in history. Even though Europe is lagging, Latin America and Sub-Saharan Africa are both growing at 4.7% on the strength of demand-driven commodity-price increases. Oh, and despite worries about real estate bubbles, as Cass Research also points out, U.S. consumer balance sheets are the strongest by every measure since 1945.
If that all feels too rosy, it is fair to concede one giant potential fly in the ointment, articulated by Mr. Cass - the one analyst I knew in the late 80s to pinpoint precisely the impending collapse of the Nikkei (and the recent highs achieved by the Dow Jones Industrial Average, and numerous market movements and political developments in between). And his warning now is dire.
"...the deteriorating geopolitical situation and a potential nuclear/military confrontation with Islamo-fascist forces in the Middle East, which are receiving growing political and military support from an increasingly autocratic and totalitarian Russian regime, which is reasserting its role as a world power, represents the most serious destabilizing geopolitical factor for the industrial economies and world financial markets since the Cuban missile crisis of 1962. The world now stands on the brink of WWIV, the first nuclear war in human history, with incalculable consequences in terms of casualties, economic and infrastructural destruction, the loss of world oil supplies and soaring energy prices, and global environmental degradation," he writes in his September 2006 report.
If Mr. Cass is right, Mahmoud Ahamadinejad in Iran, and his radical fundamentalist supporters, like Hitler in 1933, will take the system beyond the brink, while de facto appeasement helps it happen more readily. Under this theory, Al Qaeda pursues its “Master Plan” and President Bush will decide to attack unilaterally before the end of his term (what has he got to lose?) because Britain without Tony Blair won’t help, and the Europeans refuse to get tough enough in time. China and Russia, for their reasons, aren’t any help either.
This amounts to a pair of scenarios – one that sustains upward movement in the global system, the other a derailment of incalculable proportion. Both are worth considering for any global enterprise, or for investors who think that the last five years are all you need to know about the next five.