Although the global economy is emerging from recession, there is reason for continued caution. As PA Consulting Group predicted in the 2009 book The Zombie Economy, many of the banks, consumers, corporations and governments have survived the crisis, but lack the ability to breathe life back into the economy.
In many major economies, recovery has stalled or is at best proceeding hesitantly. The Eurozone presents significant risks to the global economy, with contagion risk from sovereign debt issues in Greece and other countries having the potential to damage banks across national borders. In the private sector, the liquidity position, and in particular interest cover, have improved but demand remains weak and there is still overcapacity in the system.
The global economy is moving through a difficult period of transition and one where uncertainty prevails.
Even if we escape a double dip recession, the recovery will feel like a recession. The winners in this environment, we believe, will be the liquid, the lowest-cost producers and the agile and inventive.
Capital will become a competitive weapon
Under ‘normal’ circumstances, capital is a commodity which is always available when attractive investment opportunities become available. However, in these abnormal times, liquidity can dry up suddenly or become prohibitively expensive.
At the same time, there is exceptional volatility in asset prices – notably share prices. Those who have access to capital can expect to make abnormally high returns, but they will be the minority. Highly liquid companies can make years’ worth of progress almost overnight.
The lowest-cost producers are well-placed.
Although not everyone is feeling poorer, large portions of the developed world are suffering from reduced earnings, high unemployment, a significant overhang of debt and hence reduced confidence and propensity to spend. This is true of economies which have traditionally accounted for the lion’s share of world consumption.
The consumers concerned are looking to spend money more effectively. This naturally positions the low-cost producers in each sector as potential winners. In retail, for example, ‘pound stores’ and ‘dollar stores’ are flourishing along with low-cost chains like Wal-Mart. Second-hand stores are also reporting increased profits. Some upmarket retailers, by contrast, have been losing out: Neiman Marcus reported a loss in 2009 though it is now showing signs of recovery
Companies will need to be agile to win.
Most companies are not the lowest-cost producer in their sector: these others may suffer from some current changes in consumer perceptions: increased sensitivity to cost and risk and decreased value attached to quality, functional richness, fashionableness etc. These changes in perception lead to changes in buying behaviour: prioritising essentials, postponing major purchases wherever possible, paring down the value of purchases and pouncing on bargains.
For these companies, the message is ‘reinvent or die’. Agile companies have already started to respond, often going beyond product innovation to address pricing strategy, channel strategy, sourcing strategy, business system and market positioning.
 Reuters, Neiman Marcus posts profit as sales start improving, 10 March 2010