Uncertainty always signals a need for caution. But spectacular payoffs, writes Professor Alnoor Bhimani, can also accrue from the opportunities that are presented by uncertainty. The following is his assessment of some key economic trends and the opportunities they present.
Trend 1: Globalisation
Until the late 19th century, China and India were the world's biggest economies before they were eclipsed economically by the Western world. However, in the past five years, the Chinese and Indian economies have grown at an annual rate exceeding seven per cent – far higher than the eurozone growth rate.
What has allowed such growth? Globalisation, which subsumes the digitisation of information exchange, has been one factor. Others include the adoption of flexible production technologies, the spread of cross-border trade, and political changes permitting the extensive integration of commercial activities across geographical and industry boundaries.
Half of the world's gross national product (GNP) is still produced by the industrialised West which also owns 80 per cent of the global equity worth. By 2050, these numbers will fall to less than one-fifth and one-third respectively. By contrast, emerging growth economies including China, India and Latin America will control half of the world's GNP.
Trend 2: The savings gap
The populations of Western European countries are aging rapidly with population growth steadily falling. Aging populations cause a dramatic slowdown in household savings and wealth. The effect is exacerbated by younger individuals, whose proportion is not only shrinking, but who also have a lesser propensity for saving.
As a consequence, leading economies face a significant savings gap, which is reducing the amount of capital available for investments and impeding economic growth. Until recently, cheap capital from fast-growing developing countries, such as China, has been filling the void – but this will not last.
Trend 3: The global growth of consumers
The EU now has almost half a billion citizens and is the world's largest economy. Over the next decade, another billion new consumers from developing economies will enter the global marketplace.
The availability of migrants tends to translate into cheaper goods and services. There is also an important expected impact on wage rates. Enterprises in developed and developing economies are vying for a greater share of this consumer growth while real wages are falling.
Trend 4: Booms and busts are more frequent and more extreme
Falling prices of goods imported from developing economies, combined with a resistance to allowing a rise in currency exchange rates has permitted Western economies to enjoy low rates of inflation in recent years. As a result, interest rates have remained artificially low, and until last year, drove-up real estate prices, feeding a speculative bubble.
Alongside this, developing countries have been undertaking financial reforms and tackling increasingly higher energy and commodity prices. Soon, they will cease to subsidise the world's richest countries, and will stop financing developed economies' current account deficits. Many say this could bring about a sharp revision in asset values and house prices, triggering recessionary economic troughs in the developed world. Some economists have already pointed to early indicators of these effects starting to take shape.
These trends spell challenges for some but opportunities for others:
- Business will see more competitive pricing and salary reductions across lesser skilled as well as knowledge-intense professions.
- Work that does not require interpersonal contact will command lower remuneration, benefiting some firms.
- Enterprises that are able to achieve competitive pricing of products through lower costs and the greater abundance of cheap labour will stand to gain market share.
- Swift and proactive adjustments to product pricing and positioning in the face of lower costs and greater product diversity will be rewarded.
- Realistic property prices reflect expected rental returns. When downfalls are predicted, sellers can become “too realistic” and panic. Opportunities then exist for buyers to capture the effects of exaggerated recessionary sentiments in pricing.
- Rental demand for residential properties from migrants will likely continue to boost the rental property market.
- Windfalls will accrue to those able to hasten the flow of output at reduced cost.
- Business models with more refined ways of extracting value or accelerating throughput will find wider scope and applicability.
Those who stand to lose in uncertain times enable others to gain. Intelligence centred on analysing dynamic economic shifts across the globe and uncertainty-based payoffs will prove extremely profitable. The window is now open – but for how long is itself an open question.
Dr Alnoor Bhimani is a member of the Ismaili Council for the European Union and a professor at the London School of Economics and Political Science. He is also the author of several books on the European economy, Strategic Finance and Management Control. This article has been adapted from the original publication in The Ismaili UK magazine.