Economic bubble has burst

2009-01-08 00:00

The economic bubble has finally burst. After decades of unprecedented consumer spending, the global economic house of cards has come tumbling down about our ears. Unbridled lending which has characterised much of the global economy’s growth, has proven to be the downfall of many economies. As every first-year economics student knows, there is no such thing as a free lunch, and that there is a cost attached to everything. The world’s citizens are now paying the price for the affluence created by a model of capitalism which was engineered to favour a few. The intention was always to encourage as many of the world’s consumers as possible to spend through debt, while exploiting less fortunate countries, especially those with highly prized natural resources. This in turn helped many producers to fuel continually the global spending frenzy and maximise profits in the process. The World Bank Group’s recent G20 Summit on Financial Markets and the World Economy noted that many developing economies are moving into a danger zone. It was initially thought that economic growth in developing countries would average at about 6,4% during 2009, but the revised forecast is now 4,5%, with some experiencing negative figures in both per capita and absolute terms. The economies of high-income countries are expected to contract by at least 0,1% during 2009, with global growth falling to about one percent. As always, the poor will be hardest hit. Tragically, 100 million people have been propelled into poverty during this crisis, thanks mainly to the food and fuel price shocks. It may well take a particularly strong invisible hand to establish not only balance, but also some kind of sensible behaviour in the global market place of the future.

So what is the longer-term prognosis for global business? Across the world, marketers are busy reassessing the effects of the crisis on their markets, while anxiously looking for the all-important movements in consumer behaviour which signal buying intent. For example, Andy Bond, chief executive of Asda, a major British retail chain which is owned by Wal-Mart, the world’s largest retailer, believes a new generation of shopper is emerging, one that could easily extend into the world, as consumers reprioritise their spending. Called “Generation F”, the motto of this new shopper will be frugality, with savings and the reduction of waste being the order of the day.

Like many countries, South Africa is partly dependent for its economic outcomes on the performance of the global giants that have invested in this country. The moves that they make on the global economic chessboard may well have implications for their local subsidiaries and affiliates. The McKinsey Global Survey 2008, published in November, cites the views of those executives who drive many of the world’s leading business organisations, on how they interpret the current crisis. Most respondents indicated that they expect 2009 to open with a global recession and continuing high volatility in equity markets. They also believe that financial markets will remain more stalled than liquid, with the majority expecting their own country’s gross domestic product to contract by about two percent during 2009. Most respondents also believe that governments need to be supporting a wider range of industries than simply those in the financial sector. Yet amid the doom and gloom of the current crisis many executives appear optimistic, suggesting that their companies are holding their own with the added expectation that their profits will stabilise or even increase during the fiscal year. Whatever happens, markets will readjust, but again, at a cost to business and consumers alike.

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