Beware the self-fulfilling prophecy
17 March 2008
The global meltdown is on and we all may as well pack up and go home. Led by America, every economy is in slowdown and belts are being tightened across the globe. That is what the headlines are saying. But, I believe that if we do slip into recession (locally, nationally or internationally) then we only have ourselves to blame.
The simple way out of the situation is to plan for growth, and for everyone else to do the same. I’m not talking about fictional growth – a steady 5% or even a bullish 10% - that is conjured out of thin air. I mean the growth that you would normally be confident of in less pessimistic times – growth based on the last year’s trading, customer projections and forward bookings. Maybe this comes out at a steady 5% or a bullish 10%, but at least it would be real. What may well happen now, as has happened before, is that the general air of economic gloom then causes manufacturers to forecast pessimistically rather than realistically.
A manufacturer then finds himself forecasting 0% growth when the facts should point to 5%, but he reasons that with no growth then this is not the time to invest. The new SMT line that was so badly needed over the last 12 months suddenly becomes an inappropriate luxury and is not commissioned, so the manufacturer is restrained by capacity or technology and cannot grow as he might have anticipated. So his lack of growth has become the self-fulfilling prophecy.
It is hard to know what to do. If consumers are told that times are hard, coupled by higher lending rates caused by the incompetence of the large banks, then the spending slows down, retail figures go down and the slowdown is real.
In a report last week from industry analyst Frost and Sullivan, chairman David Frigstad commented: “There are no economic measurements that support the fact that we are going into a recession. The fundamentals are strong for continued growth and the overall global economy is very healthy.” And the research backs this up by claiming that a global recession based on the US sub-prime market was disproportionate. ‘The sub-prime mortgage market accounts for $1.3 trillion of the total U.S. economy, of that only 1.5% is actually at risk. Considering the default rate of 1.5% is the same today as it was in 2004, it seems foolhardy to tie this amount to a nationwide economic downturn,’ says the report.
“Overall, our research on technology, markets, and economics clearly shows that the global economy remains strong and fuelled by technology-driven productivity improvements, enhanced logistics, global democratisation trends, better trade infrastructure, and a highly dynamic, commercially-focused Asian business community,” said Frigstad.
However, Frigland continues: “CEOs tightening their economic belt and implementing cautionary growth strategies, and consumers spending more conservatively will fundamentally cause any real slowdown or recession we may experience. The problem is a spiral effect driven by fear. A fear-based climate is causing consumers to lose confidence and cut back on their spending, banks will tighten their credit policies and turn a false perception of doom and gloom into reality, thus driving the economy into recession.”
Perhaps the real problem lies in deeper psychological reasons that I am completely unqualified to play around with. But to put it simply, not investing is a business is the easiest option. Lack of growth or business performance can then be blamed on the market, or unreliable machines, but not at the manager responsible for choosing not to invest and grow.
On the other hand the manager who does make the investment decision is held responsible for the money spent and has, quite reasonably, to justify it. The responsibility becomes far greater and the decision therefore becomes a more difficult one to make. But it should not be a cavalier or even brave decision. In a perfect world, investment decisions should be made based on proper business justifications, not by an unsubstantiated perception of the market.
This is not however, a perfect world and the scenario above of the fear-driven virtual recession turning into a real recession is possible. For reasons I have outlined in this column before though I think the electronics market is too strong as the moment to suffer a major downturn. Also, when the last major crisis hit the electronics industry seven years ago it was in part because it was going elsewhere – to EMS companies and to the Far East. That process has fairly well run its course so there is more geographical stability than there was before.
If I was a gambling man (and I am not – even when I go to Apex in Las Vegas in a fortnight!) my money would be on a slowdown, not a recession, that will blow over before we reach the summer (or winter for our southern hemisphere readers).
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