A recovery of sorts in 2010?
Although the economic gloom has heightened recently, with further earnings disappointments, surprise dividend cuts, continued financial restructurings and rights issues, we still believe there will be a recovery of sorts in 2010, partly driven by weak comparatives, as the effects of massive Keynesian fiscal injections, quantitative easings and interest rate reductions take hold. These already approximate to $13 trillion or approximately 20% of worldwide GDP of $64 trillion.
2010, a so-called mini-quadrennial year, should also benefit from the impact on client spending on the Winter Olympics in Vancouver, the FIFA World Cup in South Africa and the mid-term Congressional elections in the US. China, especially, also may see stronger growth due to the impact of the Shanghai Expo and the Asian Games in Guangzhou.
The more interesting question, probably, is how the West in particular will emerge from the current crisis and reduce the colossal government deficit needed to fund the early stage of the recovery. There seem to be two possible routes. First, the more prudent and painful – reduce government spending, increase taxes and unemployment and learn to save again. Secondly, inflate our way out of the problem and continue to spend and lend, with significant resultant increases in inflation and long-term interest rates.
Given the politically unpleasant implications of the first route and imminent general elections in the UK and Germany and mid-term Congressional elections in the US, the second course is more likely. As a result, those countries that are capital rich and have saved – like Brazil, China, India, Japan and eventually, when the oil price rises again, Russia – will benefit even more. And the Group’s strategic focus on the BRICs and Next 11, on the new media and on consumer insight, will benefit even more.
There is also evidence in recent years of a growing focus on top-line growth. Given a low-inflationary environment, limited pricing power and more concentrated retail distribution, clients are increasingly coming to the view that there is only one long-term way to compete – through innovation and branding. Promote on price and you create commodities. Innovate and differentiate, you create brands and the right to demand a premium from the consumer.
There is a growing realisation that cutting costs alone will not deliver growth targets promised to Wall Street and the City of London. There is a limit to cost reduction, but no ceiling on top-line growth – at least until you reach 100% market share. Reinforcing this trend, strategic advisors, such as management consultants like McKinsey and Bain, counsel a switch in focus from costs to revenues. Corporate strategic plans are increasingly concentrating on managing for growth, as well as managing for value.