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Red Lights on the Dashboard – What if The World Suffers Another Crash?

September 6, 2018

Since the crash of 2008 and the Eurozone crisis of 2011-12, forecasting what will happen even the near future has become a lot harder.  The rise of populist parties on the left and right; the UK vote to leave the EU; the election of Donald Trump as US President all marked a climate of “no-one knows anything” in World Affairs: a climate where political, economic and generational uncertainties are supplemented by the great unknowns of the 4thIndustrial Revolution and its impact on jobs, wealth distribution and society.

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Those in search of a quiet life might have hoped that this period would play out over time, and things return to “normal” – if such a state exists.  They are likely to be disappointed, and it may be that things are about to get a lot more unpredictable.  There is a lot of “noise” on discussion groups and social media about the possibility of another economic crash, following on from 2008.

In its Global Risks Report for 2018, the World Economic Forum identified its own economic risks which highlighted as warning factors:

  • unsustainable asset prices, eg US stocks, which have only reached higher levels in 1929 and 2000, or the global house price bubble;
  • indebtedness, where we have seen significant increases in the amount of public debt in the major economies, and where non-financial sector debt has risen from $80 trillion in 2007 to $135 trillion in 2016; and
  • structural weaknesses in the global financial system, with doubts about the robustness of banks’ risk-weighting mechanisms, and further concentration of assets in the hands of the 30 biggest banks.

WEF identified three new and emerging challenges:

  • Limited Firepower to combat a downturn – for example the lack of further scope to reduce interest rates;
  • Technological disruption through the impact of the 4th Industrial Revolution, affecting employment in developed economies and destroying the conventional pathway to growth for developing economies; and
  • Politics and protectionism – whether disputes within blocs (Brexit, NAFTA), between blocs or between nations (US, EU, China).

While the WEF noted that 2017 had been a year of recovery, the Economic Risks report concluded,

The risk is that we will hit a tipping point at which point everyone prices in these tensions, with a rush to the exits that hits asset prices, strains the resilience of the global financial system and tests whether policy-makers retain the firepower to prevent deep and long-lasting impacts on the real economy.”

Beyond Davos

Looking beyond the WEF’s warnings, we see risky behaviour in the major economies, for example the growth of covenant-lite loans in the US, which looks uncomfortably similar to the derivatives boom that led to the 2008 crash.  In Italy the new coalition Government is threatening a confrontation with the ECB and the creditor nations in the Eurozone over the size and terms of Italy’s sovereign debt, which could precipitate a crisis in Europe bigger than the one of 2011-12.

Meanwhile many of the most important developing economies: such as China, Turkey, Russia face financial, fiscal and monetary problems of their own.

The Importance of Scenario Planning

In the long period of almost uninterrupted growth from the late 80s until the 2008 crash, it was possible for strategists to assume relatively stable and benign economic circumstances.  This is no longer the case, and Governments and businesses – in formulating their medium-term strategies – need to consider the impact of adverse economic weather on their aims and objectives.

The WEF’s new and emerging challenges, combined with a further downturn, would create an extremely difficult environment, both economically and politically.  2008 has seen the loss of confidence in political and economic institutions, and the concomitant rise of populist politics, both on the right and the left.  Countries that are dealing with increased levels of debt and citizens, many of whose standards of living have stagnated or fallen since 2008, may struggle to survive another serious downturn.  Last October I blogged about the possibility of a new “Year of Revolutions”.

An economic crisis would make this considerably more likely.  And it would raise further uncertainties that only a scenario planning approach can truly factor into strategic planning.  Here are just three:

  1. Would a second financial crisis further undermine confidence in “established” institutions and political parties, or would it lead to a shift in opinion against populism (if the blame for the new crisis were attached to populist politicians)?
  2. Would the major economies have the firepower to respond to a second crisis; if not, what would be the social and political consequences? How to avoid a year of revolutions?  And what sort of societies and systems would emerge from the upheaval?
  3. How would emerging technologies play in such an unstable and volatile world economy – for example with increasing inequality leading to political polarisation?

Here at SAMI we’ll be keeping our eye on these trends and possible scenarios that might arise. Can anyone afford not to?

Written by David Lye, SAMI Fellow.

The views expressed are those of the author and not necessarily of SAMI Consulting.

SAMI Consulting was founded in 1989 by Shell and St Andrews University. They have undertaken scenario planning projects for a wide range of UK and international organisations. Their core skill is providing the link between futures research and strategy.

If you enjoyed this blog from SAMI Consulting, the home of scenario planning, please sign up for our monthly newsletter at newreader@samiconsulting.co.uk and/or browse our website at http://www.samiconsulting.co.uk

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