A Rebuilding Year

Winter 2013

A Rebuilding YeartcbrPDF normal

In a slow-growth 2013, companies need to prepare for a new future.

By Matthew Budman

Matthew Budman is editor-in-chief of TCB Review.

rebuild3Bart van Ark, chief economist of The Conference Board, would love to be optimistic about the direction of the global economy. But he’d rather be right. When he looks at Europe (recession-weary and facing potential shocks to come), China, India, and Brazil (dramatically slowing), and the United States (still in political stalemate), he sees a world having trouble getting back on track.

That’s not to say that van Ark is urging CEOs to remain cautious and conservative when it comes to investment and expansion—emerging economies’ maturation in particular provides real opportunities for companies looking to offer a wider range of goods and services. A slow-growth economy truly can have an upside.

Just how gloomy is your forecast for 2013?

Compared to some of the other major forecasts and projections out there, we are somewhat downbeat. We are looking at a slightly slower 2013 than 2012, mainly because we don’t see much recovery in the United States and certainly not in Europe or Japan. But where we differ from other forecasters most is that we do not see the emerging economies recovering the growth rate they had a couple of years ago.

Looking further out to the end of the decade and beyond, we see a slower growth rate in the global economy, related to factors like demographics and the maturation of the emerging economies. That is easily interpreted as bad news, but slower growth has its positive sides too. Rather than aiming for double-digit growth rates, there may be more room for the creation of value as middle classes mature and demand a wider variety of products and services. When we prepare for that, many companies will experience a positive side to this.

In your published 2013 forecast, you cite a wide range of issues: the consumption deficit in China, the savings deficit in the United States, the growth deficit in Europe and Japan, the unfulfilled growth potential of India and Brazil. Are these primarily problems that each region needs to address independently, or are there steps they should be taking to work together?

The world economy is completely connected, so there is definitely a need for global coordination. But that is a problem at the moment. The World Bank and the IMF are struggling to find a new model to be effective in a world in which emerging markets are making up 50 percent or more of global output, and the World Trade Organization needs to take on intellectual-property issues in a bigger way than they do now. Simple trade rules don’t work anymore. With deeply integrated global value chains today, you are simply shooting yourself in the foot if you try to protect yourself at the cost of others. But often, in a down economy, political sentiment leans toward protectionism, so it is an uphill battle.

Having said all that, the world is not flat either. Individual governments need to do the hard work of structural reforms in key markets: financial, housing, energy, labor. In the run-up to a structural crisis, these markets become unstable as demand and supply grow out of sync. And so far, many of the reforms are not going very well. Reforms in financial markets don’t seem to be getting at the heart of the problem, which is to help capital flow to those areas of the economy where it can be most productively used. Too much capital is sitting on the balance sheets of large companies that are not using it, while banks are putting up stringent conditions when lending to small and medium-sized businesses or to new entrants into the housing market. There should be a higher sense of urgency around these reforms.

So you now characterize the global economy as being in a structural crisis?

I think everyone agrees that the 2008-09 crisis was not a normal recession. The most visible structural issues resulted from the huge imbalances in some of these markets,
especially the housing market and the financial market. But problems were also becoming evident in other markets. In the labor market, our educational system is failing to churn out the human capital that companies need to invest to satisfy their demand for high skills. And in the energy market, in a global economy that’s still largely dependent on oil, our production and needs are unsustainable; even with more supply coming from recent discoveries like shale gas, as we are cutting nuclear and struggle to get more supply of renewable energy, we need to use energy more efficiently.

All these structural problems came together in this crisis, and we need to work ourselves through the needed reforms. And that takes time—five to ten years is very normal, meaning that we may be only halfway toward getting out of this hole.

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The Conference Board Review is the quarterly magazine of The Conference Board, the world's preeminent business membership and research organization. Founded in 1976, TCB Review is a magazine of ideas and opinion that raises tough questions about leading-edge issues at the intersection of business and society.