Global Economy

After a harrowing and catastrophic global recession in 2009 will 2010 bring brighter promises? The world is in recovery, though the healing will most certainly not be quick and best business practices will not resemble anything we have been exposed to over the past 3 generations. In fact, the most traditional business practices are now replacing the most “modern business practices” to put it lightly. So polish off your great grandfather’s diary and get to studying best business practices for 2010 and beyond.

In this issue I will briefly highlight the causal variables of the 2008 global financial collapse and continue on in greater depth about the emerging trends for 2010. I will point to some countries I feel will lead the world out of recession and where I think you should consider putting forth your business energies. On behalf of DCG Advisors worldwide I sincerely thank those of you who took the time to answer our year-end report card survey. In honor of the value you brought to this newsletter I have structured this issue according to your wishes and hope that throughout the year I can continue to improve upon our services to you.

THE WORLD SNAPSHOT

Over this past year and half, Companies have suffered a long and ferocious beating. Many have expired. Those that remain will emerge the strongest and be the most durable over changing economic flux. Purely entrepreneurial firms will displace traditional market leaders. Contribute this to their ability to quickly respond to turbulent economic signals, and change direction more rapidly than the larger more anchored firms. America was the first country to stumble into recession and it will be among the first countries to pick it-self back up though it will not be the top performer nor will it lead the world out of the collapse. This task falls unto the 12 less exposed economies which I will discuss later.

CAUSAL VARIABLES

In 2009, world output shrank by more than 1% (on a purchasing power parity basis). This marked the first time the global economy actually got smaller since 1945. In addition to the most common variables we have seen reported in the news and “heard it on the street” sources, the fact remains, through 2009 households had lost over $12 trillion or 19% of their wealth because of the collapse of housing and stock prices. Consequently this sapped their ability to provide strong purchasing power as most people are now focusing on saving rather than spending. As such, consumer spending which contributes about 70% of GDP will necessarily grow more slowly than the statistical bureaus are projecting. High unemployment will hold back wage gains for at least 2 years to come, wage cuts are already commonplace. Inflation may slip to zero and possibly set off a deflation spout which drives up real debt burdens and further saps a consumer’s ability to spend. The recovery felt during the latter half of 2009 was artificial, though slightly helpful, for 2 main reasons. Factories shut down at the first signs of a global contraction at the opening of 2009 but feverishly restocked nearly empty shelves beginning in the 3rd quarter. Second, massive public-spending programs began feeding through to beleaguered organizations, taxes were temporarily cut and interest rates were reduced. While this showed a positive impact on the slowdown it did nothing to address the underlying problem of consumer spending and purchasing power.

TRENDS FORECAST 2010

In 2010 I forecast the following trends. While many economist and optimists are wishing for a V-type recovery, I anticipate the pattern to more resemble a W. We will see strong healing signs in our first two quarters of 2010 and sharp pains will be felt in our last 2 quarters, though the 4th quarter will be less painful than the 3rd. We will bask in slight to moderate recovery over the first two quarters of 2011 and feel the sting of the second leg of our W in the last 2 quarters of 2011. Global output will expand by only 3.2%, well below the 5% recorded in 2007. Richer more developed countries will expand by 1.7% while emerging economies will post a greater than 5% expansion. Global trade will remain weak in 2010, growing by 3.7%. Figures indicate that many countries will raise trade barriers as currently they are well below WTO trade limits. E-commerce will grow by 5.5%, “green” efforts will be subject to continuing compromises by the Obama administration and cannot be looked at as a significant business opportunity this year. Bank loans will rise, by 5.9% globally but will still amount to less than projected. After a terrible 2009, private-equity firms will find more quality buy out opportunities this year. After a 16% drop in construction in 2009, we are set to drop another 12% in 2010 according to the American Institute of Architects. Hotels, shopping centers and corporate offices will be the hardest hit, while infrastructure projects will show the greatest development. Current government rhetoric points to the prospect that just as government spending tapers off, America is set to raise taxes sharply on high earners and investment income, further slowing recovery. History shows clearly that this can be dangerous. In both America in 1937 and Japan in 1997, ill timed tax increases sent fragile economies back into recession. Businesses and business owners will need to figure out a way to avoid this same peril less suffer the same fate. I recommend employing the “Sword and Shield” strategy whereby the sword symbolized aggressive efforts in these first two quarters to move product while the shield indicates a defensive posture in the last two quarters to save cash. For example, a more concentrated program should be deployed to save dollars in quarters 3 and 4 of 2010 in anticipation of a strong first 2 quarters of 2011.

Companies should focus the bulk of their efforts on balancing the need for short-term looseness and medium term prudence and reach out to a frugal consumer and incorporate a good citizenship program to reach out to their communities. Deflated customers need you, the business owner, to show them you care.

TOP 12 COUNTRIES TO LEAD THE RECOVERY

2010 is a terrific time to expand and here I identify the top 12 countries worthy for consideration in your expansion strategies for this year. First, look for Indonesia to replace Russia on the global stage. I submit that the BRIC’s will be replaced by the BICI’s. The Eastern European myth of fast recovery was entirely over-rated. Listed next are our unlikely heroes of 2010. Qatar will post a 24.5% increase to its GDP followed by China at 8.6%. Congo and Turkmenistan are in third place with an 8% GDP growth projected. Ethiopia and Uzbekistan show promise with a 7% projected GDP growth succeeded by Djibouti at 6.5%. Sri Lanka and India are in a respectable tie for 8th place indicating a 6.3% rise to GDP over 2009 while Iraq, Madagascar and Vietnam all rate high touting a 6% anticipated growth.

WHERE ELSE IS THERE PROMISE?

The much hyped up Poland will demonstrate a modest 1.9% growth and will be helped this year by rising investment. Look for Poland to be a player in 2011. Lithuania will sink another 4.5% after plummeting by 15% in 2009, their budget deficit will swell to 6.5% of GDP and hopes for adopting the Euro this year will fade but not be entirely unattainable. Germany, France and Italy will show modest and painfully slow increases just touching.5% this year. In Latin America look to Brazil, Chile, and Cuba to lead the recovery with greater than 3.5% GDP growth forecast in 2010.

2010 ADVICE

I made some bold predictions above; however, I’m always an optimist about the future, but a realist in day to day planning. This coming year will be challenging and sometimes bring anxiety as we try to make sense of all the experts making predictions for the future. But we must remember that as leaders it is imperative that we listen to and consider all opinions, but deep down we need to focus on our business’ core strengths and continue to move forward with realistic expectations until the tea leaves change and we develop a clear vision for our company’s future.