SAP - German SMEs' Recipe for Success
German SMEs' Recipe for Success
By Bernd Venohr, Institute of Management at the Berlin School of Economics, Germany
Globalization has brought great benefits for many German SMEs. In an interview with SAP INFO online, Professor Bernd Venohr from the Institute of Management at the Berlin School of Economics describes the strategies, management structures and processes that pave the way for global success.
Which companies are you referring to when you claim that SMEs have benefited from globalization?
Venohr: The term “SME” refers to a broad range of companies, covering everything from small corner shops to companies with annual sales of several hundred million euros. It is primarily the “high end” medium size companies that are benefiting from globalization. These are international companies with annual sales of between 50 million and a billion euros. There are around 3,200 of them in the German industrial sector. Companies such as the door technology supplier Dorma, the cooking system manufacturer Rational, and the packaging machinery producer Krones may not be household names but each boasts a global market share of 50 percent and above in its market sector.
Is this type of company particularly prevalent in Germany?
Venohr: The breadth and capacity of Germany’s SME sector is unique, although there are comparable sectors in Switzerland and Austria too. I receive inquiries from many European countries, such as France, Ireland and Belgium, where companies want to learn from Germany’s example of succeeding on the fiercely competitive global market despite being in a high-cost location.
What opportunities does globalization offer high end SMEs?
Venohr: For one, these companies can step up their activities on markets like China, India and Russia that until recently were not open to them. The range of products and services offered by many German SMEs ideally matches the demand profile in these countries – quality products for developing the infrastructure are as sought-after as premium consumer goods for the burgeoning elite. The sharp decline in transportation and IT costs has also boosted worldwide opportunities for SMEs.
Which criteria are used to evaluate the performance of German SMEs on the global market?
Venohr: The 3,200 companies in the high end SME sector are responsible for some 30 percent of Germany’s total export volume. Around 1,300 of them are ranked in the top three in their market sector worldwide. These companies have been returning above-average sales and revenue figures for many years. Double-figure growth rates are the norm.
What’s the secret of this global success?
Venohr: I attribute this success to the special “Made in Germany” management model, consisting of the strategies, management structures and processes typical of German SMEs.
What typifies this model? What strategies do SMEs pursue?
Venohr: The companies dominate niche markets worldwide. They achieve this by developing high-quality products and services, covering everything from machine tools to kitchen appliances and software. This is made possible by the capacity to innovate, something which cannot simply be plucked out of thin air. Consequently, the level of spending on research and development is well above average. It is twice as high as the international norm for the sector. The companies reap the rewards of many years’ cooperation and knowledge transfer with suppliers and research facilities at their own site. Added to this is a meticulous approach and the persistence required to set up worldwide sales and service networks. Whenever possible, the companies favor direct customer contact via their own branches. This ensures outstanding service and provides a vital source of innovations.
What role do management structures play?
Venohr: I would call the structure most commonly found among successful SMEs “intelligent family capitalism”. The companies are family-owned, but they are often run by managers outside the family from the second generation onwards. This arrangement is more common in Germany than in countries such as the U.S., the United Kingdom or France. It combines the advantages of private ownership, such as long-term objectives and independence from short-term capital market expectations, with innovative management methods. It also overcomes the Achilles heel of the “traditional” family-owned company, that is, a lack of management expertise among the generations succeeding the founder.
Which processes perfect the “Made in Germany” management model?
Venohr: It’s not only product quality that’s crucial, but also excellence in the company’s core processes, from R&D to production, marketing, sales and service. The manner in which successful SMEs have taken the principles of Total Quality Management to heart to continuously improve all these processes has been exemplary.
How important is IT in globalization for SMEs?
Venohr: Globally standardized and IT-based company processes play a vitally important role. In smaller SMEs, managers can “keep an eye” on things by moving around the company and identifying problems. However, in companies with several international locations, it is crucial to have clearly defined and standard processes, otherwise control is quickly lost and there will be impending efficiency losses. Global standardization of processes also ensures consistently high product quality and the increasingly important exchange of “best practices” between sites. This is where Germany’s top-performing software industry comes in. Germany – and not the U.S., as many believe – is the world market leader in exporting software. In addition to SAP, there are a number of highly specialized software companies, e.g. in the logistics or production sectors. IT also plays an increasingly important role in the supply of additional services, such as remote maintenance of plants online. The Internet is also a key sales channel, particularly for smaller companies. For example, I know of a small Hamburg-based company called Windpilot with two employees which sells its products exclusively online and is the world market leader in wind vanes for sailboats.
What prompted you to conduct research into SMEs?
Venohr: As a consultant, I developed strategies for large companies and SMEs. I then went on to run a venture capital fund and became familiar with start-ups. Of these three types of company, I found SMEs particularly exciting on account of their specific management models and outstanding products and services, coupled with the strong desire to perform that marks all company processes. What’s more, research into SMEs had not gone into much detail before then, mainly because these companies are often privately-owned and reluctant to disclose their figures. That meant there was fertile ground for pioneering research work.
Source: SAP Insider-->
Source: SAP INFO
Source: www.netweavermagazine.com-->
Thursday, November 29, 2007
Wednesday, November 28, 2007
Google steigt in Markt mit Öko-Energie ein - Nachrichten - computerwoche.de
Google steigt in Markt mit Öko-Energie ein - Nachrichten - computerwoche.de
Der Suchmaschinengigant Google hat eine "strategische Initiative" gestartet, um Strom aus erneuerbaren Energiequellen billiger als aus Kohle produzieren zu können.
Der Suchmaschinengigant Google hat eine "strategische Initiative" gestartet, um Strom aus erneuerbaren Energiequellen billiger als aus Kohle produzieren zu können.
Tuesday, November 27, 2007
FT.com / Companies / IT - Why nobody wants to see inflation with no clothes on
FT.com / Companies / IT - Why nobody wants to see inflation with no clothes on
Why nobody wants to see inflation with no clothes on
By John Kemp
Published: November 27 2007 02:00 | Last updated: November 27 2007 02:00
The Emperor's New Clothes, Hans Christian Andersen's fairy tale about the fear of challenging mass delusion, is a story with resonance today.
Nowhere in economic debate does such power of perception play a bigger role than in the alleged disappearance of inflation. Central banks have switched the focus of public and media attention away from the full set of "consumer prices" to a subset that excludes some of the fastest-increasing items and therefore understates the true rate of price increases. The US Federal Reserve, for example, focuses on "core inflation" - which excludes food and energy.
There is no harm in focusing on core measures to smooth out month-to-month volatility - provided the core measure and the broader inflation gauges track one another roughly over time. But during the past 10 years the US core rate has been on average 0.3 percentage points lower than the broader one. And the discrepancy is growing. Over the past two years it has been minus 0.7.
There is a perception that central banks are focusing on core measures because they are more expedient. Commentators are querying the reliability of the numbers. For most households, the published inflation rates do not accord with their own experience of rising living costs, causing a growing credibility gap that is fuelling criticism of the data.
The statistical authorities have also been "adjusting" the inflation numbers downwards to take account of improvements in quality. Most people would accept the logic of making quality adjustments for computers. But once they started going down this route, the government's statisticians have found it hard to stop. The US government is now making "hedonic quality adjustments" to a whole range of items: clothes dryers, microwave ovens, camcorders, DVD players, even college textbooks.
The problem is that no one is making any negative adjustments to take account of declines in quality. Because the data are being adjusted only for improvements, never for declines, it is arguably biasing the published inflation numbers downwards.
There is also the problem that published measures of inflation do not include the price of assets. But it is not obvious why they should be excluded. As incomes rise, households start to devote a much higher proportion of their income to the acquisition of assets (from bigger houses to larger stock portfolios and saving plans for retirement and college education). As household consumption patterns shift, so the traditional consumer price index captures a diminishing proportion of expenditure.
Crucially, asset price inflation can create just as many inefficiencies as the inflation in goods and services prices. If all financial asset values are rising rapidly, it may be hard to discern where capital can be employed most profitably, leading to indiscriminate capital allocation.
And as the financial side of the economy has grown in relation to the real one, the potential for instability arising on the financial side to spill over has grown. Excess liquidity has piled into the asset markets. Instead of excess liquidity chasing up the price of goods and services (inflation), it has chased up the price of assets (which is not inflation by the conventional definition).
There is a sense that commentators and policymakers are engaged in the collective delusion of the emperor's new clothes. Excess liquidity created by the Federal Reserve and other central banks during 2001-2005 did indeed result in faster inflation - but in asset prices rather than goods and services. It also created distortions - but in property prices, subprime mortgages and securitisations.
Even as the US housing bubble has deflated, inflationary pressures within the global economy remain strong. High commodity prices are no longer offset by declines in the price of computers, cars or imports from China.
The "death of inflation" was predicted by one economist in the 1990s. He might have characterised it better as the "disappearance" of inflation. The question for policymakers and investors alike is whether and when the little boy will shout from the crowd and break the illusion. If it happened, interest rates would have to be much higher.
The writer is the economist at Sempra Metals
Copyright The Financial Times Limited 2007
Why nobody wants to see inflation with no clothes on
By John Kemp
Published: November 27 2007 02:00 | Last updated: November 27 2007 02:00
The Emperor's New Clothes, Hans Christian Andersen's fairy tale about the fear of challenging mass delusion, is a story with resonance today.
Nowhere in economic debate does such power of perception play a bigger role than in the alleged disappearance of inflation. Central banks have switched the focus of public and media attention away from the full set of "consumer prices" to a subset that excludes some of the fastest-increasing items and therefore understates the true rate of price increases. The US Federal Reserve, for example, focuses on "core inflation" - which excludes food and energy.
There is no harm in focusing on core measures to smooth out month-to-month volatility - provided the core measure and the broader inflation gauges track one another roughly over time. But during the past 10 years the US core rate has been on average 0.3 percentage points lower than the broader one. And the discrepancy is growing. Over the past two years it has been minus 0.7.
There is a perception that central banks are focusing on core measures because they are more expedient. Commentators are querying the reliability of the numbers. For most households, the published inflation rates do not accord with their own experience of rising living costs, causing a growing credibility gap that is fuelling criticism of the data.
The statistical authorities have also been "adjusting" the inflation numbers downwards to take account of improvements in quality. Most people would accept the logic of making quality adjustments for computers. But once they started going down this route, the government's statisticians have found it hard to stop. The US government is now making "hedonic quality adjustments" to a whole range of items: clothes dryers, microwave ovens, camcorders, DVD players, even college textbooks.
The problem is that no one is making any negative adjustments to take account of declines in quality. Because the data are being adjusted only for improvements, never for declines, it is arguably biasing the published inflation numbers downwards.
There is also the problem that published measures of inflation do not include the price of assets. But it is not obvious why they should be excluded. As incomes rise, households start to devote a much higher proportion of their income to the acquisition of assets (from bigger houses to larger stock portfolios and saving plans for retirement and college education). As household consumption patterns shift, so the traditional consumer price index captures a diminishing proportion of expenditure.
Crucially, asset price inflation can create just as many inefficiencies as the inflation in goods and services prices. If all financial asset values are rising rapidly, it may be hard to discern where capital can be employed most profitably, leading to indiscriminate capital allocation.
And as the financial side of the economy has grown in relation to the real one, the potential for instability arising on the financial side to spill over has grown. Excess liquidity has piled into the asset markets. Instead of excess liquidity chasing up the price of goods and services (inflation), it has chased up the price of assets (which is not inflation by the conventional definition).
There is a sense that commentators and policymakers are engaged in the collective delusion of the emperor's new clothes. Excess liquidity created by the Federal Reserve and other central banks during 2001-2005 did indeed result in faster inflation - but in asset prices rather than goods and services. It also created distortions - but in property prices, subprime mortgages and securitisations.
Even as the US housing bubble has deflated, inflationary pressures within the global economy remain strong. High commodity prices are no longer offset by declines in the price of computers, cars or imports from China.
The "death of inflation" was predicted by one economist in the 1990s. He might have characterised it better as the "disappearance" of inflation. The question for policymakers and investors alike is whether and when the little boy will shout from the crowd and break the illusion. If it happened, interest rates would have to be much higher.
The writer is the economist at Sempra Metals
Copyright The Financial Times Limited 2007
Monday, September 17, 2007
Sachbuch - Feuilleton - FAZ.NET - Sachbuch: Erst kommt die Katastrophe, dann der Kapitalismus
Sachbuch - Feuilleton - FAZ.NET - Sachbuch: Erst kommt die Katastrophe, dann der Kapitalismus
17. September 2007
Im September 2005 hatte Naomi Klein einen Autounfall. Sie war in die wenige Tage zuvor vom Hurrikan „Katrina“ verwüstete Stadt New Orleans gereist, um sich den Stand der Hilfsleistungen anzusehen. Auf den überschwemmten Straßen, die niemand mehr kontrollierte, herrschte Anarchie, und als der Wagen der kanadischen Globalisierungskritikerin von einem anderen Fahrzeug gerammt wurde, zog sie sich Schnittwunden und Prellungen zu.
17. September 2007
Im September 2005 hatte Naomi Klein einen Autounfall. Sie war in die wenige Tage zuvor vom Hurrikan „Katrina“ verwüstete Stadt New Orleans gereist, um sich den Stand der Hilfsleistungen anzusehen. Auf den überschwemmten Straßen, die niemand mehr kontrollierte, herrschte Anarchie, und als der Wagen der kanadischen Globalisierungskritikerin von einem anderen Fahrzeug gerammt wurde, zog sie sich Schnittwunden und Prellungen zu.
Tuesday, July 10, 2007
Friday, May 11, 2007
Tuesday, March 27, 2007
FT.com / Home UK / UK - We have become rich countries of poor people
FT.com / Home UK / UK - We have become rich countries of poor people
We have become rich countries of poor people
By Joseph Stiglitz
Published: September 8 2006 03:00 | Last updated: September 8 2006 03:00
There were once hopes that globalisation would benefit all, both in advanced industrial countries and the developing world. Today, the downside of globalisation is increasingly apparent. Not only do good things go more easily across borders, so do bad - including terrorism. We see an unfair global trade regime that impedes development and an unstable global financial system in which poor countries repeatedly find themselves with unmanageable debt burdens. Money should flow from the rich to the poor countries, but increasingly, it goes in the opposite direction.
What is remarkable about globalisation is the disparity between the promise and the reality. Globalisation seems to have unified so much of the world against it, perhaps because there appear to be so many losers and so few winners. The Panglossian view of globalisation, that it would automatically benefit all, has impeded the ability to address its failures. Young French workers ask how globalisation is going to make them better off - if, as they are told, they must accept the resulting lower wages and weakened job protection. Growing inequality in the advanced industrial countries was a long predicted but seldom advertised consequence: full economic integration implies the equalisation of unskilled wages throughout the world. Although this has not (yet) happened, the downward pressure on those at the bottom is evident. Unfettered globalisation actually has the potential to make many people in advanced industrial countries worse off, even if economic growth increases.
While economic theory predicted there would be losers from globalisation, it also said that the winners could compensate the losers. Well-managed globalisation can make everyone, or at least most, better off. This has not happened. Instead, conservatives have argued that globalisation requires countries to become more competitive by cutting taxes and rolling back the welfare state. In the US, tax policies have become less progressive; the bulk of recent tax cuts went to the winners, those who had already benefited both from globalisation and changes in technology. Increasingly, we are becoming rich countries with poor people.
The Scandinavian countries have shown there is another way. Investment in education and research and a strong safety net can lead to a more productive and competitive economy.
At the core of many of globalisation's failures is a simple fact: economic globalisation has outpaced the globalisation of politics and mindsets. We have become more interdependent; greater interdependence increases the need for co-ordinated action. But we still lack the institutional frameworks to do this effectively and democratically.
Perhaps not surprisingly, more attention is often placed on the concerns of developed countries and their special interests than those in the developing world. It is good news that we are finally doing something about the crushing debt burdens of the poorest countries but we have done little to ensure the debt problem does not arise again, and nothing to create a systematic mechanism for debt restructuring. The fact that so many countries end up with unmanageable debt burdens suggests that the problem is systemic. Global markets are highly volatile and too often the poor bear the brunt of exchange rate and interest rate changes. Yet nothing has been done about these underlying problems.
There are already numerous solutions on the table: some that could be adopted overnight, some that would take years but would at least make globalisation work better. If developing countries could borrow in their own currencies (or in baskets of correlated currencies), fewer countries would find themselves with massive debt burdens. Other reforms in debt management strategies could help further stabilise the global financial system. Consider, as another example of globalisation's failure, the diseases that plague so many of the poor countries. The global intellectual property regime denies access to affordable life-saving drugs, even as the Aids epidemic ravishes so much of the developing world. Advocates of the current system say this is the price for providing incentives for research. But for those concerned about health in developing countries, the intellectual property regime has not worked. There is an alternative: a medical prize fund, financed by industrialised countries, could reward those who discover cures for diseases of the poor, provide incentives for research and award bigger prizes for key drugs. The medicines could then be provided to the poor at cost. Such a system would be both far more efficient and equitable than the current system.
Globalisation can be changed; indeed, it is clear it will be changed. The question is: will change be forced on us as the result of a crisis, or will we take control of the globalisation process? The former risks a backlash against globalisation or a haphazard reshaping in a way that only sets the stage for more problems. The latter holds out the possibility of remaking globalisation so that it can live up to its potential to improve living standards throughout the world.
The writer was awarded the Nobel Prize in economics in 2001; his latest book, Making Globalization Work (W.W. Norton/Penguin) is published this month
Copyright The Financial Times Limited 2007
We have become rich countries of poor people
By Joseph Stiglitz
Published: September 8 2006 03:00 | Last updated: September 8 2006 03:00
There were once hopes that globalisation would benefit all, both in advanced industrial countries and the developing world. Today, the downside of globalisation is increasingly apparent. Not only do good things go more easily across borders, so do bad - including terrorism. We see an unfair global trade regime that impedes development and an unstable global financial system in which poor countries repeatedly find themselves with unmanageable debt burdens. Money should flow from the rich to the poor countries, but increasingly, it goes in the opposite direction.
What is remarkable about globalisation is the disparity between the promise and the reality. Globalisation seems to have unified so much of the world against it, perhaps because there appear to be so many losers and so few winners. The Panglossian view of globalisation, that it would automatically benefit all, has impeded the ability to address its failures. Young French workers ask how globalisation is going to make them better off - if, as they are told, they must accept the resulting lower wages and weakened job protection. Growing inequality in the advanced industrial countries was a long predicted but seldom advertised consequence: full economic integration implies the equalisation of unskilled wages throughout the world. Although this has not (yet) happened, the downward pressure on those at the bottom is evident. Unfettered globalisation actually has the potential to make many people in advanced industrial countries worse off, even if economic growth increases.
While economic theory predicted there would be losers from globalisation, it also said that the winners could compensate the losers. Well-managed globalisation can make everyone, or at least most, better off. This has not happened. Instead, conservatives have argued that globalisation requires countries to become more competitive by cutting taxes and rolling back the welfare state. In the US, tax policies have become less progressive; the bulk of recent tax cuts went to the winners, those who had already benefited both from globalisation and changes in technology. Increasingly, we are becoming rich countries with poor people.
The Scandinavian countries have shown there is another way. Investment in education and research and a strong safety net can lead to a more productive and competitive economy.
At the core of many of globalisation's failures is a simple fact: economic globalisation has outpaced the globalisation of politics and mindsets. We have become more interdependent; greater interdependence increases the need for co-ordinated action. But we still lack the institutional frameworks to do this effectively and democratically.
Perhaps not surprisingly, more attention is often placed on the concerns of developed countries and their special interests than those in the developing world. It is good news that we are finally doing something about the crushing debt burdens of the poorest countries but we have done little to ensure the debt problem does not arise again, and nothing to create a systematic mechanism for debt restructuring. The fact that so many countries end up with unmanageable debt burdens suggests that the problem is systemic. Global markets are highly volatile and too often the poor bear the brunt of exchange rate and interest rate changes. Yet nothing has been done about these underlying problems.
There are already numerous solutions on the table: some that could be adopted overnight, some that would take years but would at least make globalisation work better. If developing countries could borrow in their own currencies (or in baskets of correlated currencies), fewer countries would find themselves with massive debt burdens. Other reforms in debt management strategies could help further stabilise the global financial system. Consider, as another example of globalisation's failure, the diseases that plague so many of the poor countries. The global intellectual property regime denies access to affordable life-saving drugs, even as the Aids epidemic ravishes so much of the developing world. Advocates of the current system say this is the price for providing incentives for research. But for those concerned about health in developing countries, the intellectual property regime has not worked. There is an alternative: a medical prize fund, financed by industrialised countries, could reward those who discover cures for diseases of the poor, provide incentives for research and award bigger prizes for key drugs. The medicines could then be provided to the poor at cost. Such a system would be both far more efficient and equitable than the current system.
Globalisation can be changed; indeed, it is clear it will be changed. The question is: will change be forced on us as the result of a crisis, or will we take control of the globalisation process? The former risks a backlash against globalisation or a haphazard reshaping in a way that only sets the stage for more problems. The latter holds out the possibility of remaking globalisation so that it can live up to its potential to improve living standards throughout the world.
The writer was awarded the Nobel Prize in economics in 2001; his latest book, Making Globalization Work (W.W. Norton/Penguin) is published this month
Copyright The Financial Times Limited 2007
Wirtschaftspolitik - Wirtschaft - FAZ.NET - Frankreich: „Wir brauchen eine europäische Wirtschaftsregierung“
Wirtschaftspolitik - Wirtschaft - FAZ.NET - Frankreich: „Wir brauchen eine europäische Wirtschaftsregierung“
27. März 2007
Michel Sapin, seit mehr als dreißig Jahren Mitglied der Sozialistischen Partei (PS), ist einer der wichtigsten Wirtschaftsberater von Ségolène Royal. Mit ihr und ihrem Lebensgefährten François Hollande, der die Wirtschaftsthemen ebenfalls stark mitbestimmt, ging Sapin im gleichen Jahr auf die Eliteschule Ena. Kürzlich wurde Sapin der für Wirtschaftsfragen zuständige Parteisekretär und folgte damit Eric Besson, der nach eigenen Angaben aus Enttäuschung über die mangelnde Kompetenz von Royal das Wahlkampfteam verließ.
27. März 2007
Michel Sapin, seit mehr als dreißig Jahren Mitglied der Sozialistischen Partei (PS), ist einer der wichtigsten Wirtschaftsberater von Ségolène Royal. Mit ihr und ihrem Lebensgefährten François Hollande, der die Wirtschaftsthemen ebenfalls stark mitbestimmt, ging Sapin im gleichen Jahr auf die Eliteschule Ena. Kürzlich wurde Sapin der für Wirtschaftsfragen zuständige Parteisekretär und folgte damit Eric Besson, der nach eigenen Angaben aus Enttäuschung über die mangelnde Kompetenz von Royal das Wahlkampfteam verließ.
Friday, February 02, 2007
Tuesday, January 02, 2007
FT.com / Columnists / Wolfgang Munchau - The good, the bad and the ugly scenarios
FT.com / Columnists / Wolfgang Munchau - The good, the bad and the ugly scenarios
The good, the bad and the ugly scenarios
By Wolfgang Munchau
Published: January 2 2007 18:48 | Last updated: January 2 2007 18:48
The past 10 years have proved the economic optimists right. I would expect the pessimists to fare better in the next 10 years. The question is: will the cynics get lucky in 2007?
There is a widespread consensus that the world economy is facing a mid-cycle slowdown in 2007. Rather than trying to make a single forecast for the year, it is probably best to look at three underlying scenarios for the US economy – still the global trendsetter whatever the fashionable decoupling theories may say. The three scenarios are: a soft landing; a hard landing with growth of between 0 and 1 per cent; or recession.
The soft landing is the mainstream prediction. It is endorsed by the US Federal Reserve, countless other central banks around the globe and the vast majority of private and public sector forecasters. No one should bet against it lightly. A soft landing would see US growth falling to an annual rate of about 2 per cent.
This is the scenario on which the world’s central banks and governments have based their current policies. If it prevails, we should expect global economic growth to continue at a respectable pace this year. The eurozone and Japan would be able to grow at rates close to trend – about 2 per cent in real terms. The world’s three largest economies would be perfectly synchronised.
This scenario assumes that the slowdown in the US housing market will have a limited impact on the US domestic economy. Calculating the effect of sluggish house prices on personal consumption is hard at the best of times. When that recession is unusually sharp, when the domestic savings rate is below zero and when there is additional uncertainty about the long-term effect of the boom in mortgage equity withdrawals, the spill-over becomes impossible to forecast.
If the slowdown in house prices is worse than expected, or if the spill-over from property to the rest of the economy is bigger, then we enter scenarios two or three. I would personally consider scenario two – a hard landing short of a recession – to be the most probable.
The most recent data suggests that we have not yet reached the bottom of the property market recession. There has been some conflicting information. Building permits have fallen significantly for two consecutive months, while new homes sales have gone up most recently. But the confidence index of the National Association of Home Builders is near an all-time low (see chart). The widely followed ISM index shows that manufacturing has entered into a recession. If unemployment were to rise as a result of the slowdown in housing and manufacturing, then it would be rational for consumers to increase their savings rates again, just as it was rational to reduce them during the previous upswing.
Scenario two would have important implications for monetary policy. The Fed would start to ease monetary policy in 2007, but may remain constrained by the persistently robust core inflation rates. The European Central Bank has also fully bought into the soft-landing scenario. If the ECB continues to tighten policy during the first quarter, it might end up with an excessively tight policy stance, which would almost certainly have a negative impact on eurozone growth. The Bank of Japan would have been in a similar predicament if it had started, prematurely, to raise interest rates in December.
Under scenario three, US economic activity would decline for a sustained period, usually defined in America as two consecutive quarters or more. It takes a brave forecaster to make such a call. One of the few is Nouriel Roubini, chairman of RGE Monitor, the economics information website, who has been sticking his neck out since July. Recessions happen from time to time, but they are rarely predicted. What would it take to turn the present downswing into a recession? The spillover from the housing market to the rest of the economy would have to be much bigger. Consumers would have to build up savings much faster. There may be financial distress among mortgage lenders. We have already seen some warning signs in the sub-prime mortgage market. If some large hedge funds were to bet their entire wealth – or more – on the soft-landing scenario, the financial system itself could come under strain. While it is relatively easy to construe recession scenarios, it is impossible to predict that any of these events will actually happen this year.
None of the scenarios envisage the world decoupling from the US. In the first, benign scenario, the US, Japan and the eurozone would grow by about 2 per cent. In scenario three, several mechanisms would carry the shock of a US recession around the world economy – a fall in global equity prices, a falling dollar and a fall the profits of multinational companies. There is no way that the eurozone and Japan could withstand such a shock and manage to grow by 2 per cent under such circumstances.
The real problem with scenario three is not the short-term economic effect, undesirable as it may be, but the political fallout. The bigger the downturn, the bigger the anti-globalisation backlash. Depending on exchange rate movements, we could see an outbreak of protectionist pressures in the US or Europe, or both.
US trade relations with China may deteriorate under the Democrat-led Congress. There has also been a swing to the protectionist left in Europe. In France, the two leading contenders for this year’s presidential elections are both exploiting popular fears of globalisation in their campaigns. A consensus has sadly emerged among French intellectuals that it is the job of the government to protect the people against globalisation. In Germany, too, there has been a notable swing to the left in the traditionally conservative CDU, the party of Angela Merkel, the German chancellor.
My own gut feeling is that protectionist pressures in Europe will rise dramatically when the euro’s exchange rate hits $1.40. The trouble is that under scenario three, an exchange rate of $1.40 is highly probable. This is one important reason why the conflagration of a recession and a rising anti-globalisation sentiment could do lasting damage to the world economy. If the optimists are right, again, we can avoid such a confrontation; the world can look forward to another good year. We may still be able to avoid it under scenario two, but probably not under scenario three – the one that few dare to forecast and that all fear the most.
Copyright The Financial Times Limited 2007
The good, the bad and the ugly scenarios
By Wolfgang Munchau
Published: January 2 2007 18:48 | Last updated: January 2 2007 18:48
The past 10 years have proved the economic optimists right. I would expect the pessimists to fare better in the next 10 years. The question is: will the cynics get lucky in 2007?
There is a widespread consensus that the world economy is facing a mid-cycle slowdown in 2007. Rather than trying to make a single forecast for the year, it is probably best to look at three underlying scenarios for the US economy – still the global trendsetter whatever the fashionable decoupling theories may say. The three scenarios are: a soft landing; a hard landing with growth of between 0 and 1 per cent; or recession.
The soft landing is the mainstream prediction. It is endorsed by the US Federal Reserve, countless other central banks around the globe and the vast majority of private and public sector forecasters. No one should bet against it lightly. A soft landing would see US growth falling to an annual rate of about 2 per cent.
This is the scenario on which the world’s central banks and governments have based their current policies. If it prevails, we should expect global economic growth to continue at a respectable pace this year. The eurozone and Japan would be able to grow at rates close to trend – about 2 per cent in real terms. The world’s three largest economies would be perfectly synchronised.
This scenario assumes that the slowdown in the US housing market will have a limited impact on the US domestic economy. Calculating the effect of sluggish house prices on personal consumption is hard at the best of times. When that recession is unusually sharp, when the domestic savings rate is below zero and when there is additional uncertainty about the long-term effect of the boom in mortgage equity withdrawals, the spill-over becomes impossible to forecast.
If the slowdown in house prices is worse than expected, or if the spill-over from property to the rest of the economy is bigger, then we enter scenarios two or three. I would personally consider scenario two – a hard landing short of a recession – to be the most probable.
The most recent data suggests that we have not yet reached the bottom of the property market recession. There has been some conflicting information. Building permits have fallen significantly for two consecutive months, while new homes sales have gone up most recently. But the confidence index of the National Association of Home Builders is near an all-time low (see chart). The widely followed ISM index shows that manufacturing has entered into a recession. If unemployment were to rise as a result of the slowdown in housing and manufacturing, then it would be rational for consumers to increase their savings rates again, just as it was rational to reduce them during the previous upswing.
Scenario two would have important implications for monetary policy. The Fed would start to ease monetary policy in 2007, but may remain constrained by the persistently robust core inflation rates. The European Central Bank has also fully bought into the soft-landing scenario. If the ECB continues to tighten policy during the first quarter, it might end up with an excessively tight policy stance, which would almost certainly have a negative impact on eurozone growth. The Bank of Japan would have been in a similar predicament if it had started, prematurely, to raise interest rates in December.
Under scenario three, US economic activity would decline for a sustained period, usually defined in America as two consecutive quarters or more. It takes a brave forecaster to make such a call. One of the few is Nouriel Roubini, chairman of RGE Monitor, the economics information website, who has been sticking his neck out since July. Recessions happen from time to time, but they are rarely predicted. What would it take to turn the present downswing into a recession? The spillover from the housing market to the rest of the economy would have to be much bigger. Consumers would have to build up savings much faster. There may be financial distress among mortgage lenders. We have already seen some warning signs in the sub-prime mortgage market. If some large hedge funds were to bet their entire wealth – or more – on the soft-landing scenario, the financial system itself could come under strain. While it is relatively easy to construe recession scenarios, it is impossible to predict that any of these events will actually happen this year.
None of the scenarios envisage the world decoupling from the US. In the first, benign scenario, the US, Japan and the eurozone would grow by about 2 per cent. In scenario three, several mechanisms would carry the shock of a US recession around the world economy – a fall in global equity prices, a falling dollar and a fall the profits of multinational companies. There is no way that the eurozone and Japan could withstand such a shock and manage to grow by 2 per cent under such circumstances.
The real problem with scenario three is not the short-term economic effect, undesirable as it may be, but the political fallout. The bigger the downturn, the bigger the anti-globalisation backlash. Depending on exchange rate movements, we could see an outbreak of protectionist pressures in the US or Europe, or both.
US trade relations with China may deteriorate under the Democrat-led Congress. There has also been a swing to the protectionist left in Europe. In France, the two leading contenders for this year’s presidential elections are both exploiting popular fears of globalisation in their campaigns. A consensus has sadly emerged among French intellectuals that it is the job of the government to protect the people against globalisation. In Germany, too, there has been a notable swing to the left in the traditionally conservative CDU, the party of Angela Merkel, the German chancellor.
My own gut feeling is that protectionist pressures in Europe will rise dramatically when the euro’s exchange rate hits $1.40. The trouble is that under scenario three, an exchange rate of $1.40 is highly probable. This is one important reason why the conflagration of a recession and a rising anti-globalisation sentiment could do lasting damage to the world economy. If the optimists are right, again, we can avoid such a confrontation; the world can look forward to another good year. We may still be able to avoid it under scenario two, but probably not under scenario three – the one that few dare to forecast and that all fear the most.
Copyright The Financial Times Limited 2007
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