Time to change your bandwidth scenario

The discussion on whether we are going to return to the old levels of economic demand, or whether we are going to experience a double-dip, is not essential. Essential is that if we are going to run our organization in a responsible way and then we have tot take several possibilities into account. Everything seems to point to a recovery around existing levels of demand, with a very limited growth  thereafter.  But there are a number of factors which might point to a double dip or a W-recession or a second downturn. Development of buying power in the Western World, lack of substance in Chinese and Korean demand, and stagnation in the Middle-East might support a double dip. Entrepreneurship and leadership should enable being able to act pro-active if it occurs.

Time to change your bandwidthscenario

We believe in developing several bandwidthscenario’s to effectively manage organizations and companies. Up till now we could do with two of them; a scenario in which we return to the levels of demand of 2007 and the first three quarters of 2008 and a second scenario in which we see a careful recovery around existing levels of demand. Over the last three months people who think that we are going to return to 2007/8 levels now seem to be convinced that that is not going to happen. The 2007/8 scenario (scenario 1) does not need a lot of attention anymore.
The double dip or the W-recession
So, scenario 2 assumes a careful recovery around existing levels of demand with a modest growth rate from those levels. Apart from scenario 1 and 2 we think we now need to develop a new scenario. A scenario which assumes a W-recession; a new drop in demand worldwide. We don’t believe in spending a lot of time discussing the question whether it is going to happen or not; we think it is essential to prepare your organization for the possibility of a double dip. There are a number of issues which might indicate the possibility that the double dip occurs.
Development of buying power in the Western World
A number of factors made the levels of buying power come down considerably in the last years. In the Western World we tend to believe our social security system guarantees a reasonable level of buying power.
We might be in for some disappointment. If we look at Holland as an example.
–    Unemployment allowances are substantially reduced especially in the length of the period in you get them. New in Holland and for now not widely recognized as a major change: a large number of people drop out of the unemployment allowances period without having a job. The number for 2008 is 150.000.
–    The number of people who work under a (fixed) labour contract is decreasing. In Holland the category of people who work (without personnel) without a labour contract is now over 1 million.
–    The number of people working in small companies, with their income directly dependent upon their business performance (disappointing for all business segments at the moment) is estimated around 150.000.
–    People in roles as real estate agents, notary public, lawyers with an income sensible for the current recession, might be around 100.000.
We assume the group of people with an income which is highly sensible to the current recession will be around 1.5 million on a total labor force of 6.5 million. The number of Dutch households living below levels of minimum spending power is reported to be 545.000 in 2008 and increasing.

In other words, in social responsible Holland the social security levels are not enough to sustain spending power.

There is another factor which has changed compared to the past. Everybody in Holland used to think that if they got into some sort of difficulty they could always sell some of their property. Especially houses seemed to be as good as gold. That has certainly changed. If you find yourself in a position that you cannot pay your mortgage anymore, banks will add the monthly rates to your total debt. They will do that until the total debt is higher than the bank feels comfortable with, and then you will have to sell your house. If that does not succeed, the house will be offered at auction with the most likely result that you end up with a considerable debt without any collateral. Thing as cars and boats are equally difficult to sell.

Reduction in buying power
The further reduction in buying power will not increase consumer confidence. Even if there is an increase in consumer confidence; than hope will not be enough to actually increase consumer spending. People have become careful in a rapidly changing environment. A further reduction in actual spending seems likely. Companies will be reluctant to invest if consumers are lacking confidence.

Can we extrapolate this trend to Europe and the rest of the World? Yes, Holland, together with Scandinavia is “State of the Art” in social security. The rest of the World will experience buying power development which is going to disappoint, compared to current expectations, as it does in Holland. Also; China and the US will not make the difference and Korea is much too small to have a major impact.

Hope from China?
China is growing and will continue to do so, is what we hear.  True, but China has made tremendous adjustments to its economy as an answer to the financial crisis. An unconfirmed rumor has it that they closed 15% of their factories in one of the growth area’s in one year. Unemployment was tremendous, so closure of production units was followed instantly by letting people go. They came from a much lower level and they manage growth now. But with such high levels of unemployment they will also experience buying power restrictions and with the world as their major market; they will find demand decreasing. Strategic buying of raw materials by the Chinese government distorts official statistics.

Hope from the US?
Obama is a believer. Green is the color of the future and the basis of hope for economic recovery. Essential is that with a structural reduction in demand any investment will be a replacement, and not so much an initial or new investment. Replacement investments will be green, no doubt. But it still will be investments to cover existing capacity. We don’t expect the rules of the game to change. CleanTech is the buzz word now, but for the time being those projects will most probably be replacement investments also.

Conclusions: chances for hope?
Yes, hope for a better World in the end. Chances in improving human values, in a better and more caring and careful social environment. Less predictability of continuous material growth, more predictability in increasing human value and better ways to handle the society and the world.

Organizations can improve in flexibility. They can develop the relevant scenario’s and should not be surprised by change. They can invest in people, care for them, invest in CSR (Corporate Social Responsibility) and ensure continuity in a new way. Shareholders don’t want to be disappointed either.
Robert J. (Bob) Fetter, Intersumma, consultants in commercial control, January 2010 (column also available in Dutch)