Well that’s it then. We are, judging from the latest data, at the beginning of the economic end. Not the end of all things, of course, but the end of the current downturn.
So, straight back to business normal? Not so fast. While policy responses to the financial market cataclysm were massive and surprisingly timely, thus slowing the decline and likely preventing a descent into a 1918-style economic Depression, the economic itself has changed in important ways over the last twelve months, which will transform the way businesses, large and small, must think.
Consumers have gone from profligate spenders to profligate savers. From a negative U.S. personal savings rate three years ago – consumers spent more than they saved – we have zoomed in the last year to 4% personal savings, and are headed higher yet over the next year or two, perhaps as high as 10%. With every percentage point increase in personal savings representing roughly $100-million in lost consumer spending, we have seen $400-million in annual spending come out of the U.S. economy in the last 18 months, and we could see another $600-million come out of by 2011.
When will this stop? In short, it won’t. Consumers have learned a number of lessons over the last few years, chief among them is that they can’t rely on real estate or stock markets to do their saving for them — they must do the saving themselves. And so they will, which is a return to what used to be the case a few decades ago. The U.S. consumer can no longer be the perpetual motion machine fuelling the U.S. and global economy.
Export nations full of profligate savers, like Germany, Japan, and China, must become spenders. But that won’t be an easy change. The natural reaction to economic carnage, like we have seen in the last year, is to save more, not less. And that is doubly true in places like China where the consequences of low savings are so dire given the absence of a social safety net. Convincing such people to spend represents the triumph of hope over experience, as Oscar Wilde famously said about a man’s second marriage.
The upshot is that there is a “new normal” looming. Rather than the cheery 3.4% real GDP growth that we have seen globally in recent years, we will return to growth, but at a considerably lower level. How low? With consumers trying to repair their broken balance sheets – too little income supporting too much debt, much of that in busted real estate – we should not expect a resurgence of spending any time soon. My guess is that will translate into a focus on practical purchases, as well as lower overall GDP growth, perhaps 2% annually, or 140-basis points below what we had seen previously worldwide.
That may not seem like much, but it is immense. It represents an almost halving in global growth, a decline that will be felt most sharply in the U.S. and in other developed economies. It is growth, nevertheless, and small business has big advantages, like lower costs and greater flexibility, and they should use to them to position themselves for the new economic normal ahead.