Monday, June 29, 2009

Where is the world economy headed?

Where is the world economy headed? This is the first post of a series designed to investigate (not try to answer- see The Prediction Trap at this question.
We are frequently hearing phrases like "recovery", "back to normal", "green shoots" but will the world economy recover in a way similar to past recoveries?
Many people are hoping this will happen. In North America especially, we have had it pretty good for the last two decades. Most people hope that (as was the case in the last couple of recessions) we'll see some pain for a few months, then things will get back to "normal." In fact, the majority of the government money that has gone to stimulate the economy is based on this hope.
I'm not convinced that this time we will see that type of recovery. There are many signs that this time things will be different. Upcoming posts will be about why I think this way, and how to prepare for the uncertainty (and there is more information available at the Thinking for Results web site.)
For now, I want to focus on the issue of expectations and assumptions.
My first book "Thinking for Results - Success Strategies" and my recent book "The Prediction Trap - and how to avoid it" both examine the effect of our filters on our thinking. The recent financial crisis was exasperated by many instances where planning and strategic decisions were made using heavily filtered information. A striking example was the number of people who assumed - an assumption being a part of someone's filter - that housing prices would always go up. (In actual fact, I expect that in addition to the few who were warning publicly that this was an unsafe assumption, there were more who thought it privately, but who realized they could profit from others' assumptions even if the assumptions weren't true.)
In the current environment, many people assume that there must be a recovery. It has always happened before. But this time around, many things are different.
For one, there is the issue of Peak Oil and energy decline that I have been speaking and writing about for several years now. Well known economist Jeff Rubin has just written a book specifically on this topic called "Why your world is about to get a whole lot smaller." He argues that energy decline, and the corresponding rise in the price of oil last year, was a significant contributor to the economic turmoil. This is not an entirely new argument, but at this point in time it is receiving a lot of publicity, for good reason.
After last year's dramatic rise in oil prices, the economic contraction led to a drop in oil consumption, leading to an equally dramatic drop in prices. But now, even though demand has yet to rise again, oil prices have doubled since their low point. Since old oil production will continue to decline, and planned new production has been put on hold in many cases, any uptick in demand will lead to an increase in prices. So right off the bat, any industry dependent on oil - for example air travel and shipping - will see costs rise if demand rises. Not exactly the "back to normal" they would like.
Here's a question for you: in your situation, at work and at home, what will be different this time around?

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