founder Richard Branson has similar space ambitions to Musk.
Like Siyabulela Xuza who has a minor planet named after him by NASA for his rocket fuel and who is now studying at Harvard University, Musk has become a superstar in America. It speaks volumes about the difference between American and South African culture. Americans celebrate individual excellence no matter where it comes from. It looks for the heroes of the future. We tolerate mediocrity and celebrate only heroes of the past.
The latest global economic scenarios
We are not out of the woods yet. Our scenario with the highest odds of 40% remains “Hard Times” with the world remaining uniformly flat in economic terms for the foreseeable future. Equally, the two-speed “Ultraviolet” scenario – where growth in the New World economies outperforms that in the Old World economies by a factor of 3:1 – still has a 30% probability. In this scenario, the younger demographic profile of the New World acts as an accelerator versus the ageing demographic profile of the Old World acting as a brake. China remains the key flag to watch. We retain our anxiety about its banking system, in addition to which we are now beginning to worry about it becoming more expensive in its production costs. This will necessitate a move from cheap replication of Western ideas to innovation and completely new products, a transition that Japan made in the 1970s. Will China rise to this challenge? We are not sure and it is the reason why we slightly favour “Hard Times” for everybody.
As far as the two outsiders are concerned – the “Forked Lightning” of a second crash and the “New Balls Please” of a full recovery creating another boom albeit of a completely different nature – we now split the odds at 15% each. Quantitative easing by the principal central banks is keeping interest rates on government debt down, thus reducing the risk of national default; and unemployment in America is falling towards the critical level of 6.5% which will inspire confidence that a proper but slow recovery is in place.
There you have it. Don’t bet on a single future. Rather keep all four of our possible futures in mind, watch the flags go up or down, adjust the probabilities and adapt your strategies and tactics as you go along. More and more companies are agreeing with the greater flexibility inherent in our approach when faced with these volatile times.
Eleven years ago Chantell Ilbury and I co-authored a book called The Mind of a Fox. In it we said that much of the future is beyond your control and is uncertain. The only way to handle it is to play different scenarios, examine their probability and impact and look at the options to seize the opportunities offered in each scenario and counter the threats.
Before the Great Financial Crash of 2008 the majority of companies preferred to base their strategy on a single, expertly-driven forecast. Now they are not so sure and are much more willing to interrogate their vision and strategy by measuring the resilience of both against a variety of scenarios. In particular, they are prepared to change the fundamental direction of the business should a case be made for doing so.
Hard Times
What are we now telling our clients about the possibilities for the global economy? The first scenario we call “Hard Times” for at least the next five years. It is a flat-line future of minimal economic growth for the world as a whole. Essentially, it is the Japanese experience for the last 22 years despite that country implementing easy-money policies throughout the period and attaining the highest national debt to GDP ratio of any country anywhere (210% of GDP against a recommended maximum of 60%). Japan has averaged 1% p.a. economic growth compared to 8% p.a. in the 1970s and 1980s. The Nikkei stock index is now below 9 000 compared to nearly 40 000 in December 1989.
In the “Hard Times” scenario, companies with intelligent strategies will continue to grow but companies with mediocre strategies will go to the wall. Value for money and the cheaper alternative are the key drivers of consumer behaviour, so companies that reflect this trend in their product offering will do well.
Ultraviolet
The second mainline scenario we offer is called “Ultraviolet”. It is where the Old World economies go through the five year ‘U’ while the New World economies experience a ‘V’ like recovery and grow at least three times faster than their Old World colleagues. In other words, we live in a two-speed ‘UV’ world where the principal strategy for multinational companies is to chase the ‘V’. For many American and European companies it is their favourite scenario. Accordingly they are doing everything they can to establish a presence in China, India, Africa and South America.
Our principal flag for choosing between “Hard Times” and “Ultraviolet” is China’s future economic growth rate. If it remains in the range of 8–10% p.a. then all the countries supplying China with resources will continue to do well in China’s slipstream. If, however, China has the kind of wobble that Japan had at the end of 1989, then everybody is condemned to “Hard Times”. We have gone more negative on China for two reasons: exports constitute 38% of China’s GDP and exporting into a flat Europe does China’s growth prospects no good; and in major cities outside of Beijing and Shanghai there are large numbers of unoccupied suburbs where municipalities have borrowed the money to build them from Chinese banks. These loans could go bad and trigger a banking crisis in China.
Accordingly, we give a 40% subjective probability to “Hard Times” during the next five years and 30% to “Ultraviolet”. Like two racehorses leading the field but with not much distance between them, they are jockeying for prime position. Watching the data coming out of China on its economy is thus a continuous activity. Of course, you can bet on both scenarios by offering value for money and chasing the ‘V’ at the same time.
New Balls Please
We would not be good futurists if we did not explore the outer limits of the cone of uncertainty that opens up into the future. We have two scenarios which we call ‘outsiders’, but for which Malcolm Gladwell would prefer the term ‘outliers’. The first is an extremely positive one where Ben Bernanke’s policy of almost zero interest rates works for the US – the world’s largest economy. It fully recovers next year and drags the whole world up with it in a full-scale ‘V’. The title of this scenario is “New Balls Please”, a Wimbledon expression to signify the players are getting new tennis balls because it is a new set.
We feel the recovery will usher in a completely different game for which new balls are needed in two important respects. Firstly, the East will be the economic equivalent to the West, thereby overturning several centuries of Western supremacy. Marketing strategies of companies will need to accommodate this. Secondly, the world is finally running out of resources and there is no Planet B. With rising population numbers and a widespread economic recovery, resource prices will go through the roof – oil possibly reaching $500 a barrel. One statistic says it all: if China ever mirrors American standards of living we would need four planets (which we have not got).
Technologies which improve the efficiency of resource consumption, particularly oil and metals, will be the most sought after as will substitutes like solar energy. More efficient supply chains which reduce the freight cost element in the final price of a product will also be a precondition for competitiveness. Our lifestyle will probably change whereby shopping at local neighbourhood stores will be preferable to travelling to distant malls. Localisation will replace globalisation.
At the moment, we only assign a 10% probability to this scenario as the two flags which would indicate it is in play are down: a drop in the US unemployment rate to around 7% (it has come down from 9.5% to 8.3% but still has a way to go); and a levelling-off or reduction in the national debt to GDP ratios of the Old World economies to indicate that governments are finally getting their financial affairs in order. Obviously, the best strategy in this scenario is to invest in resource businesses (like farming, water, mining and energy) as well as renewable alternatives to fossil fuels.
