Global Economic Outlook, October 2009

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2009 has come to a close and all one can say is “good riddance.” It was the worst year for economic performance in recent memory, and began on the heels of a near breakdown of the financial sector. At the start of 2009, economists found themselves opining on the probability of another Great Depression. Thankfully, the year ended on a more positive note, with economists offering their views on the potential strength of the all-but-certain recovery.

The main theme of the economic outlook for the coming year is that the global economy seems to be tracking towards a better-than-expected outcome. Most of the world’s major economies are now growing and some, like Japan and the Eurozone, began growing sooner than most analysts expected. The global crisis was notable for the near synchronicity of the downturn; likewise, the upturn appears to be happening everywhere at once – something that is not usually the case. The good thing about this is that strengthening global demand is self-reinforcing, especially as it boosts trade flows and export-oriented production. The mostly synchronous policy response to the crisis (fiscal and monetary expansion) probably played a key role in the global recovery, and the risks of the recovery are similar in most places. These include the lingering effects of financial market stress, as well as the possibility of future inflation.

As for the world’s retailers, economic recovery will return the industry to a growth path – but the nature and geographic distribution of that growth will be quite different than the recent path. In the decade prior to the current economic crisis, there was strong retail growth in the United States and in smaller economies like the U.K., Spain, and Ireland. Such growth was funded, in part, by borrowing against the increased value of homes, itself the result of a flood of liquidity from surplus countries like China. This excessive consumer spending growth was not only the principal source of economic growth in these countries, it also fueled export-driven growth in surplus countries like China, Japan and Germany. In fact, the symbiosis between these “consuming” and “producing” groups of countries was the hallmark of the global economy in the first decade of the 21st century.

The next phase in retail growth All of that is about to change, however. The global economic crisis of 2008-09 exposed the fault lines of the imbalanced global economy. When the inflated values of property-based assets peaked and then collapsed, global financial institutions suffered huge losses. The resulting loss of confidence caused a near shut-down in global credit markets as investors fled to the safety of short-term government securities. Moreover, indebted consumers were forced to dramatically shift gears: they increased savings, paid down debt and ceased to spend with abandon. That crisis is ending and the recovery is clearly underway, but the global pattern of consumer spending of the past decade will not return soon.

In the coming decade, the countries that borrowed heavily to finance excessive consumer spending may experience slower consumer spending growth as households struggle to de-leverage, repair tattered balance sheets and accumulate wealth for future retirement and other needs. More of the economic growth of these countries will likely be driven by exports, business investment and government spending. Conversely, those countries whose growth was fueled by exporting to borrowing countries will no longer be able to depend on such markets. Consequently, countries like China will likely shift away from export-oriented growth toward growth driven by consumer spending. The degree to which this adjustment takes place (and transitions smoothly) will depend on the policies put in place by various governments. Nevertheless, an adjustment of some sort will almost surely take place.

For global retailers and their suppliers, the next decade will bring a very different business environment. Not only will the growth of consumer spending shift geographically, but the nature of consumer spending will shift, as well. In places like the United States and the U.K., retail spending growth will not only be slower, it will be focused on the needs of a value-oriented consumer, and the recent shift in market share toward discount formats may very well be sustained during the recovery. The weakness of housing markets will have consequences, as well, because spending on discretionary items is likely to be restrained.

On the other hand, countries like China that ran large surpluses will experience faster consumer spending growth. A larger share of the growth of global retail spending will now take place in such markets – especially the large emerging markets

Let’s consider some of the major markets and the outlook for their consumers and retailers.