Amid the claims by many commentators that the end of the recession is in sight, it is easy to forget just how deep and desperate the economic crisis has been.
Last September, the world’s financial system was on the edge of a precipice and required unprecedented levels of support. The global economy entered freefall: demand contracted across the world, trade plummeted and stock markets lost an estimated $50 trillion in value.
This steep decline continued until March, when stock markets bottomed out. In May the President of the European Central Bank announced that a point of inflection had been reached, meaning that the economy was contracting at a decreasing, rather than ever-faster, rate. In the same month the Organisation for Economic Co-operation and Development also announced that leading indicators had turned positive. Since then, several economies have returned to some form of growth. As a result, most commentary has become far more positive, with many hailing the imminent end of recession.
Celebration is premature. The scale and depth of the crisis mean that its effects will be felt for much longer. Importantly, it has left four zombies in its wake — banks, consumers, governments and companies. These may appear to be recovering, but each is still haunted by the recession — and these will permanently alter our economic and corporate landscapes.
Banks’ trading may be highly profitable, but enormous unrecognised toxic assets remain on their balance sheets. The International Monetary Fund estimates that of $3.4 trillion of losses incurred during the crisis, almost half are yet to be recognised. Zombie banks will take several years to rebuild their balance sheets. During this time lending will be far tighter than we are used to and tighter than the economy needs to sustain healthy rates of growth.
The existence of zombie banks is having a profound knock-on effect. Consumer confidence is reduced, of course, but, because spending based on credit has collapsed, consumers, even if they wanted to, cannot spend as they did. Governments are feeling the zombie effect from having pumped trillions of dollars into support packages. In many countries, debt-to-GDP levels are higher than at any time since the Second World War. This level of stimulus is not sustainable. Finally, in the West, many companies still have too much debt; there is huge over-capacity in many sectors and demand is down. Profits have collapsed in most sectors.
The simultaneous existence of these zombies is something outside the experience of anyone in business today, making definitive predictions difficult. There is a clear risk, however, of the zombies combining to create a vicious circle of downward forces on the economy, increasing our vulnerability to a second dip in the recession.
In most sectors, there will be a significant number of outright failures and consolidation of weaker players. The crisis will polarise individuals, companies and nations into winners and losers.
Mark Thomas is Head of the Strategy and Marketing Practice at PA Consulting Group. This is the first of five articles based on a new book The Zombie Economy: Leadership in times of uncertainty (PA Consulting, £12.99)
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