Clem Sunter

Global scenario update

2010-06-23 13:29

Just over a year has elapsed since I wrote the article on global flags, scenarios and probabilities. It’s time for an update. Below is the latest global gameboard that Chantell Ilbury and I use in strategy sessions with clients:

Going clockwise from top left, we start with "Hard Times" continuing for the world economy for another three to five years. It’s a “U” scenario across the globe. The reason this scenario has credibility is that the problem which created the "Hard Times" in the first place - the magnitude of debt owed by governments, businesses and consumers - has not gone away. All it has done is change in nature from a private sector problem concerning the solvency of the banks to a public sector problem concerning governments which are running up large budget deficits, and racking up an unacceptably high level of national debt.

The latter problem is more difficult to solve. Whereas governments could justify bailing out the banks because taxpayers might lose their bank deposits, it is a much harder case to argue when governments start bailing each other out. Moreover, while a superfund may solve the liquidity problem of financially strapped governments in the short term, it does nothing to resolve the competitiveness of those nations in the long term. Indeed, it can even undermine any industrial renaissance by allowing the recipient nation to defer tough decisions. All in all this scenario presumes the mess takes a long time to clean up.

The second scenario, “New Balls Please”, is currently backed by Tim Geithner and Ben Bernanke, two heavy-duty American punters. In it, we’re over the worst, 2010 is a year of transition, 2011 will see a mild recovery and 2012 we’re back in the game. It is a V-shaped recovery rather than a U-shaped recession. We gave this scenario its name after Wimbledon where a new game requires new balls.

There are four critical differences between the old and new game: the banks will be more heavily regulated; credit will be harder to get; the East will be the economic equivalent of the West; and more effective resource supply/ utilisation in the face of growing scarcities of metals, oil, food and water will be the basis of the next wave of technology.

The third scenario is called "Ultraviolet" or “UV” to indicate a two-speed world, some regions going through a “U” while others experience a “V”. We would nominate Europe, the UK and Russia for a “U” and Brazil, Africa, China and India for a “V”. Japan could go either way having undergone a 20 year “U”. America likewise in light of the government there having to rectify its budget deficit.

The last scenario, “Perfect Storm”, is a seriously deep “U” triggered by a combination of political and economic events, including another major war, nuclear terrorism, widespread national defaults or an upsurge in protectionism. It portrays an unstable, hostile world where recession is replaced by depression.

At present, Chantell and I give only a 20% chance to “New Balls Please” because two of the three flags which would indicate the scenario is in play are firmly down and only one is half up. The two flags down are a serious reduction in unemployment and in debt worldwide. The one half up is an improvement in property values and stock markets, but not to pre-recession levels.

We attach a 30% probability to “Hard Times” and 40% to “Ultraviolet”, the flag differentiating the two being the near-term performance of the Chinese economy. If China has a wobble because of labour problems or the property bubble bursting there (as it did  in Japan in 1990), it’s “Hard Times” or double-dip for all. Otherwise it’s a “UV” world; and, with the Chinese authorities having the confidence to allow a limited float for the Yuan, this is looking increasingly likely.

We treat “Perfect Storm” as a wild-card scenario, giving it odds of 10%. The rising tension between North and South Korea, the standoff between the West and Iran over its nuclear programme and the continuing war in Afghanistan are all potential flags.

Nevertheless, as we say to our clients, please disagree with our flags and probabilities if you feel we are wrong. We just think it is more sensible to have a structured debate around scenarios, flags and probabilities than to bet the whole shop on a single projection, however expertly it is crafted.

Send your comments to Clem

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