economy | Paul Wallbank - Communications Professional

Links of the day – Terrorism, deflation and London’s rebirth

The terrorist murders in Paris lead today’s links of the day.

Today’s links kick off with the worldwide reaction to the terrorist atrocity in Paris. The other links, which pale in contrast, include why we should really fear deflation, the decline and rise of China and how to understand a food critic.

Cartoonists unite over French terrorist murders

After the terrorist atrocity that saw twelve people murdered in an attack on a magazine office in Paris, cartoonists around the world have shown their reaction.

Why Europeans should fear deflation

Yesterday the main economic news was the Eurozone had re-entered a deflationary period. Irish economist David McWilliams explains why deflation scares governments and banks with some lessons from the Great Depression.

The decline and rise of London

In 1939 London reached its peak population of 8.3 million then saw declines for the next fifty years as war, government policies and economic restructuring saw the city’s attractions wane.

Sometime this week London will pass its 1939 peak and Citymetric magazine looks at the reasons for the decline and why the recovery began.

China’s incredible disappearing former leader

In November 2012 Chinese leader Hu Jintao stepped down from his post. Since then he’s effectively disappeared from public view Foreign Policy magazine reports.

At the same time many of his allies and supporters have been purged from their party positions as part of a major change in direction for the Chinese government. What this means for the parties’ cronies who’ve been propping up property prices across the Pacific and Macau’s lucrative casino business remains to be seen.

What restaurants should know about food critics

First impressions matter warns former restaurant critic for the New York Times and Los Angeles Times, Ruth Reichl, in a terrific interview with Open For Business.

Reichl’s advice is good for pretty well any business; make sure your first impressions are good, don’t rip off your customers or be too pushy with upselling and train your staff. It’s an entertaining insight into a field dominated by egos that’s largely becoming extinct.

Work in an age of abundance

Our society is changing as we enter an age of abundant information and automation

We aren’t prepared for the changes technology is bringing our society warns Vivek Wadhwa in Our future of abundance—and joblessness.

Vivek makes the important point that in the near future many of the jobs we take for granted today will be replaced by machines, this is similar to the warning from Andrew McAfee that a wave of innovation is going to overrun businesses over the next two years.

That innovation is going to cause massive disruption; as Vivek notes we’re going to see the loss of jobs in occupations as diverse as taxi drivers, farmers and – probably the most underestimated of all affected occupations – managers.

Of course this is not first time we’ve seen massive changes to our economy and over the last century farming has gone from one of the most labour intensive industries to one of the most automated.

The automation that changed farming though created millions of new jobs; today’s retail and food industries employ far more people than agriculture did a century ago and most of those jobs were made possible by the same technologies that reduces the need for farm workers.

Vivek acknowledges this in quoting Ray Kurzweil in that jobs are lost only if we look narrowly at the industries and communities affected.

Automation always eliminates more jobs than it creates if you only look at the circumstances narrowly surrounding the automation. That’s what the Luddites saw in the early nineteenth century in the textile industry in England. The new jobs came from increased prosperity and new industries that were not seen.

What we have to acknowledge though is the transition to a new economy won’t be painless and that millions of people will be dislocated and some communities will cease to exist – just as the bulk of the developed world’s populations moved from rural villages to industrial cities during the Twentieth Century.

The truth is we don’t know how that process is going to evolve; then again, neither did our forebears a hundred years ago.

A hundred years ago we were at the beginning of an age of abundant energy and that changed society beyond recognition in the course of the century, at the end of this century of abundance our society will be very different again.

A need for cultural change

Creating a more resilient economy will take a culture shift and a change in the way all of us think.

On Sunday the Murray Report into the Australian Financial System was handed down with a range of recommendations on ensuring the stability and future of the nation’s banking and finance institutions.

Choosing David Murray, the former CEO of the nation’s biggest bank, was controversial but it turns out he and his team have delivered a sensible overview of the opportunities, risks and challenges facing Australia’s financial sector and economy. Many of the recommendations though require a change in both the culture of banks and that of the country’s population towards investment and savings.

A key part of the review is identifying the lessons learned from the Global Financial Crisis of 2008 in an attempt to reduce the country’s vulnerability to external economic shocks and limit the taxpayers’ exposure to any consequential bank failures.

In proposing ways of strengthening the nation’s banks against similar future shocks The report identifies a cultural problem in the finance industry.

Culture of financial firms

Since the GFC, a persistent theme of international political and regulatory discourse has been the breakdown in financial firms’ behaviour in failing to balance risk and reward appropriately and in treating their customers unfairly. Without a culture supporting appropriate risk-taking and the fair treatment of consumers, financial firms will continue to fall short of community expectations. This may lead to ongoing political pressure for additional financial system regulation and the undermining of confidence and trust in the financial system.

Interestingly, exactly this sentiment is echoed by last week’s World Of Business on BBC Four where host Peter Day reported from the recent Drucker Forum spoke to various economists, bankers and market commentators.

Breaking the debt culture

A key point raised in Day’s story was best expressed by Gary Hamel, Management expert and professor at The London Business School who said; “I think what the global financial crisis revealed — in addition to a lot of mendacious bankers who had lost touch with their social role — was the fact we’d been sustaining living standards through debt. I think that overhang is still there.”

The Global Financial Crisis was a warning the late Twentieth century model of using debt to sustain living standards was coming to an end, of all the western countries Australians had been one of the most enthusiastic nations about using debt to underpin consumption and that debt obsession had allowed the nation to skirt the worst of the GFCs effects.

With personal debt still at astronomically high levels it’s unlikely Australia will be able to avoid the next global financial shock and part of Murray’s recommendations are aimed at making both the economy and the banking sector more resilient to those shocks.

A fall in income

For the bankers this means lending less money and stricter financial controls; it almost certainly will mean their incomes will fall and it will be harder for millions of Australians to borrow money for easy speculation in the property market.

Creating a more resilient economy will take a culture shift in more than just highly paid bank staff, it will require a change in the way all of us think.

Acknowledging the human costs of disruption

Disruption and change come at a human cost that we need to acknowledge

As we talk of the dramatic changes facing business and society today it’s worthwhile noting a much greater displacement happened in the Twentieth Century as electricity, the motor car and communications drove the greatest increase in standards of living that humans have ever seen.

Our great-great grandparents lived through a period of change far greater than that we will see as their lives and communities were radically transformed.

Many common jobs in the early 1900s had ceased to exist by the middle of the century as cars replaced horses, mains electricity replaced town gas and refrigeration changed shopping habits. In the second half of the century affordable motor vehicles and television saw our cities reshaped around suburban life, a process now being reversed.

The structural change to economies saw a shift in population and jobs; a hundred years ago thirty percent of the US labor force was employed in agriculture, today it’s around two percent. Despite the shift, jobs were eventually found for those displaced from farms.

Shifting from an agricultural economy to an industrial society didn’t come without costs however, the price paid by the affected communities and individuals was huge as documented by Steinbeck’s Grapes of Wrath and Dorothea Lange’s photos.

While it’s unlikely we’ll see the deprivation of The Great Depression repeated in a modern welfare state, it’s important to recognise the real human costs of technological change. For politicians and community leaders it could define how history judges them.

Where will the digital leaders come from?

Exactly what is digital leadership?

Last Thursday in Sydney a group of industry groups, telcos and local councils launched their 2030 Communications Visions initiative; a project “to shape a digital vision and set of goals for Australia to achieve global digital age leadership”.

The project is a worthy one, particularly given the failure of Australia’s National Broadband Network, which I’m writing about early next week in Technology Spectator however one thing that bugs me is what exactly is ‘digital age leadership’.

If we look at the rollout of technologies like the motor car, electricity or telephone through the Twentieth Century it was a mix of private companies, community groups and governments that championed the development of roads, mains power and phone systems. People either demanded their towns became connected or raised the capital to do it themselves.

So on one level, the champions need to be us. We have to lead our communities and industries by using the technologies and showing what can be done, that also makes our businesses more likely to succeed in the future.

On another level, we need to consider the genuine leaders of the ‘electrical age’ or ‘motor car age’; people like Thomas Edison and Henry Ford built businesses that led the world and still exist today.

For countries, it’s no coincidence that the United States is the richest nation on the planet after having most of the leading business in their industries over the last hundred years.

That latter point is really what the Digital Visions project is about; do Australians want to remain a wealthy nation in the Twenty First Century?

Governments have a role in this, as the UK is showing, and political leaders need to be encouraged to take the digital economy however governments can only do so much and successes like Silicon Valley are more a fortunate by product of spending rather than the consequence of strategic policy.

Ultimately, leadership starts with us — we can’t afford to wait for governments, big business or someone else to take the reigns.

The Economist’s World in 2015

The Economist’s predictions for 2015 are a mixed bag

One of the annual features in The Economist is it’s World In… edition where the magazine makes predictions on the year ahead.

For 2015 the magazine has its usual wide range predictions; some safe, some risky and some out of left field, like Papua New Guinea topping the world growth lists for next year on the back on a new LNG plant comping online.

Economy: The fastest-growing economy in the world in 2015 will be Papua New Guinea, where GDP will expand by nearly 15%. China will drop its growth target to 7% (from 7.5%). Overall, global growth will be higher in 2015 (3.8%) than in 2014 (3.2%).

Business: Singapore tops the Economist Intelligence Unit’s global business environment rankings for 2015. Watch out for Xiaomi, a Chinese mobile-phone maker, as it continues its meteoric rise and goes global. And expect a welcome return, at least in some places, to the nine-to-five culture in the

Interest rates: In the United States and Britain, where growth is relatively robust and unemployment is coming down, interests rates will start to rise in 2015, ending a long period of ultra-low rates. In the euro zone and Japan, by contrast, central banks will continue to ease monetary policy, to battle against deflation. The diverging paths of the main central banks will lead to more volatility in equity,

Statistical landmarks: It will be a year of striking “crossovers”, as America overtakes Saudi Arabia to become the world’s biggest oil producer, China overtakes America to become the world’s biggest economy (measured at purchasing-power parity) and Facebook overtakes China in terms of its

Elections: Britain will have another hung parliament after its general election in May, with David
Cameron probably remaining prime minister. But Canada’s leadership is likely to change hands in an October election, with the Liberals’ Justin Trudeau taking the helm.

The environment: A deal of sorts will emerge from the Paris summit in December 2015. Hydrogen- powered cars will hit the road, as Toyota and Honda launch the first mass-market fuel-cell models. And Australia will be in the global spotlight as the UN decides whether the Great Barrier Reef should be put on the endangered list.

Technology: “Wearable” technology will be all the rage, thanks to the launch of the Apple Watch and other devices. Virtual-reality firms will overcome the cost and technology problems that have prevented their products from becoming mass-market hits. And mobile phones will become mind-readers, thanks to “anticipatory computing”, which enables them to trawl their users’ data to predict events

Sport: Australia will win the cricket World Cup, New Zealand will win the rugby World Cup and the United States will win the women’s football World Cup.

Space: America’s New Horizons spacecraft will fly by Pluto, after a journey of nearly nine years – maybe igniting a campaign to reinstate Pluto as a fully-fledged planet from its current “dwarf” status.

Some of the predictions are obvious while others may be a bit longer term than 2015. Overall it’s an interesting range of predictions and in the next few days I’ll post an interview with two of The Economist’s editors, Vijay V. Vaitheeswaran and Daniel Franklin, justifying their forecasts for the year ahead.

Reframing the economic debate

It’s time to change the political and economic discourse says Irish economist David McWilliams

“We need to stop the drift in politics and economics,” says Irish economist David McWilliams.

McWilliams is talking about Ireland and asking where the nation goes for the next two decades as European agricultural support programs wind up and Irish tax advantages erode.

That conversation though is one that every economy, every nation and every community needs to be having in the face of a rapidly changing world.

Assuming that what’s working, or muddling along, today will be successful tomorrow is a brave belief.

Returns in a low growth world

GE CEO Jeff Immelt sees a different world of investing and business in coming years where growth is slower

Today GE had their At Work conference in Sydney where CEO Jeff Immelt was interviewed by Westfarmers’ boss Richard Goyder.

One of the key messages from Immelt in his interview with the Australian conglomerate’s CEO was that finding growth in a flat global economy is going to take hard work and creativity; just relying on increased domestic spending is not longer an option.

Immelt was particularly pointed about the developed world’s economies, “the US is best since the financial crisis, growth is broad based but it’s still in the two to two-and-a-half percent range. It may be that’s the new normal.”

“Europe and Japan are pretty tough, forty percent of the world’s economy is still difficult, not going downward but stable and flat.”

Preparing for a slow growth world

“We’ve prepared ourselves for a slow growth world but one where you can invest in growth.”

“There’s still opportunities out there,” Immelt observed. “We’re going to have to make our own growth.”

Part of that growth story relates to the end of the consumerist era where debt funded consumer spending, particularly in the US, drove the global economy.

“We are coming out of a time period of the last ten or fifteen years where the US grew four and half percent every year with no inflation. So the US was the dominant economy in the world during the 1980s and 1990s.”

“We knew that was not going to be the same, so we’re in a world with no tail wind where we think greater focus on things like R&D, globalisation and things like that which will be critically important.”

Changing business focus

One of things Immelt did after the global financial crisis was to change the focus of the business away from the consumer finance division that had been a river of gold over the last thirty years back to being an industrial infrastructure company.

“Everyone needs to paranoid about relevancy and what they do great in the world today. There is no shelf life for reputation or anything else.”

“The engine of growth in the US when it was growing at its best was the US consumer, both in the combination of their own wealth and in taking on leverage. That was the engine of growth from 1980 to 2007.”

“It ended badly, but those were big engines of growth. What will be the next engines of growth?” Immelt mused.

Asian consumers to the rescue

Immelt sees the rise of Asian economies as being the next growth drivers with over billion consumers rising in affluence.

Whether those Asian economies can generate the growth that the hyper-developed economies of North America, Europe and Japan were able to provide during the past thirty years remains to be seen given China’s, and most of Asia’s, consumers having nothing like the West’s spending power.

The truth is we’re decades off Asia’s huddled masses having the economic strength to carry the global economy in the way the western world’s consumers did for the closing decades of the Twentieth Century.

For economies like Australia that are largely based upon domestic consumption funded by debt, this will mean a massive redirection of the economy away from renovating houses to investing in productive industries.

Immelt’s message to business leaders is clear; don’t rely on a rising tide of domestic growth to keep you afloat. Companies are going to have to find new markets and products if they want to grow, waiting for customers to arrive is no longer an option.

Did Apple kill the Finnish economy?

The Finnish Prime Minister jokingly blames Apple for his economy’s problems, but the real challenges are familiar to all western countries.

Last week the Finnish Prime Minister, Alexander Stubb, raised eyebrows with his suggestion that Apple killed the country’s economy with the iPhone putting Nokia out of business and the iPad reducing global demand for paper.

The real reason for Finland’s immediate problems is a lack of diversity; any country dependent upon one or two businesses or industries is going to be vulnerable should markets move against them.

In the longer term though the problems facing Finland are similar to those across the western world; an aging population, shrinking workforce and tepid export markets.

Finland’s real problems are our problems. How the Nordic nation deals with them will provide some valuable lessons to us all.

Understanding the China narrative

The world needs to prepare for a very different Chinese economy warns Patrick Chovanec

The problem facing commentators on the Chinese economy is a lack of clear narrative and the rest of the world needs to understand the story believes economist Patrick Chovanec.

Chovanec was speaking at Sydney University’s China Studies Centre last night on how the Chinese economy is shifting from being export lead to relying on domestic consumption, a process that isn’t without challenges.

“There’s a kind of schizophrenia about the Chinese economy,” says Chovanec who describes how the news swings from extremes of all good news to dire warnings. This, he believes, is because of a lack of understanding of the processes underpinning the country’s changing position.

Comparisons with Japan

China’s growth has been underpinned by export lead growth model which is a very good way for a poor country to become rich quickly but reaches limits when the exporters’ markets become saturated and the buyer countries can no longer buy.

This was the dilemma Japan hit in the 1990s and Chovanec sees similarities which happened at an earlier stage of China’s economic development because of its far greater size.

In another respect is the cost of labour which sees the country in the same position as Japan in the 1960s where where manufacturing started moving to Taiwan, South Korea and Hong Kong due to high Japanese wages.

The problem of soaring labour rates is covered by Peter Cai in today’s China Spectator which includes this chart showing how selected emerging economies wages compare.

Cai points out manufacturing is already shifting out of China with Vietnam being a favourite destination.

This has already had an impact on companies’ decisions to manufacture items in China. In 2000, China made 40 per cent of all Nike shoes, while Vietnam made 13 per cent. Fast-forward to 2013, and China’s production share was 30 per cent, Vietnam’s increased to 42 per cent.

Vietnam however has its own problems and Cai sees China having advantages in having superior infrastructure, integrated supply chains, and a better educated workforce that will slow relocations.

Building productivity

Chovanec is more optimistic about the Chinese economy seeing bringing sectors like agriculture and medicine up to Western standards of productivity as potential growth areas for China.

“Having worked in China for many years, I see a lot of productivity gains across the Chinese economy.”

Many of the earlier productivity gains were low hanging fruit – labour was cheap making it easy to improve productivity. As workers become higher paid, that low hanging fruit is gone with reforms harder to implement along with many more affluent interests who would be losers in a rebalanced economy.

Among the losers in the transition from today’s economy would be property developers and export focused manufacturers while winners would be retailers and service industries.

The switch to consumption

In his view, China is capable of making the transition: “The most precious global commodity is domestic demand,” Chovanec says. “China has that cushion to invest in the face of fall in consumption, that doesn’t have to mean a fall in Chinese living standards.”

For the rest of the world the question Chovanec believes has to be asked is what will that consumption led Chinese economy look like and what does it mean for those with a stake in China?

“Other countries are going to be winners and losers from China’s rebalancing. You have to think about what you want to be.”

Australia has a particularly difficult problem in the face of a rebalanced China, Chovanec believes.

“The problem for Australia is that the country has been the supplier to China’s investment boom. If China’s investment boom comes to an end then Australia no longer has no market.”

Optimistism and the future

Despite the challenges Chovanec is optimistic about China. “My experience in going to China in 1986 is that the Chinese government and Communist Party deserve a lot of credit for getting out of the way.”

The success of China’s economy over the last thirty years has been driven from the grass roots; “this was a bottom up process, not a top down model.” Chovanec says.

Unlike many of the populist writers on China, not to mention more hysterical politicians and commentators, Chovanec provides a nuanced view on the underlying dynamics and the evolution of the Chineses economy.

That we need to consider a world where the Chinese economy is very different is an important message and one that policy makers and business people need to think very carefully about.

Reaching Peak Tablet as iPad and android sales begin to plateau

An electrical retailer’s financial results might mark turning points in two different economies.

Today Australian electronics retailer JB Hi Fi released its annual results. They confirm what’s been becoming apparent over the last year that tablet computer sales seem to have peaked.

A plateauing of tablet sales is bad news for retailers like JB whose stock price fell by 8% on the news.

It’s not surprising that tablet computer sales have peaked as the growth had been spectacular and, unlike PCs of a decade ago, there isn’t an obvious five year replacement cycle.

That the old PC industry business model doesn’t apply to tablets is why Apple is focusing on other revenue sources like the App Store and internet of things plays such as HomeKit and HealthKit.

Once again, the industry leaders are finding they have to pivot to stay up with a rapidly evolving market.

The other notable point from JB’s management was that Australian consumer confidence is tanking, which might indicate the economy is entering its first recession in twenty years.

If it is true that the Aussie economy is entering a recession, then it might be time for the adults to take charge in a very immature government. Some of the Liberal Party’s pampered princelings may have to start earning their salaries soon.