We move, slowly, to summer. As I write this, the headlines are saying that the U.S.’s trade dispute with China could escalate. It’s hard not to think about this spat as having mostly to do with the White House’s political posturing. While a more equitable trade balance between any two countries is a good thing, the potential cost in terms of economic dislocation and global stock market reaction far outweighs the political benefit, especially for a President whose support rests on such a small base of voters (and dwindles daily).
In that context, when we look around the world across our practice groups and our client work, there are more dislocations bubbling up than just the U.S.-China trade dispute. Is there a tipping point coming that organizations should be preparing for in their issues, crisis management and communications planning? We think there is.
The current market cycle is just over ten years old. The anniversary, much covered in the news media, was March 9. That’s not just the U.S. equity markets. Look at the FTSE, the DAX and the MXX and you’ll see the same result. While China is experiencing a slowdown now, which it will still spend itself out of using hard currency reserves, and Brexit will undoubtedly spell economic dislocation for the U.K., the fact is that on the surface the world economy appears to be in pretty good shape.
Last week’s U.S. job numbers are notable. The U.S. has enjoyed 100 consecutive months of job growth. The unemployment rate hasn’t been this low since 1969. And now real wage growth is also taking hold which starts to address the wealth gap between those who have benefited most from the expansion and the rest of the country.
The American republic experienced 49 recessions since its formation, beginning with the “panic” of 1785 which marked the end of the business boom that followed the American revolution. In my own adulthood, I’ve experienced seven recessions beginning in 1969. Every recession is at its heart the result of one kind of “irrational exuberance” or another, a term coined by Fed Chairman Alan Greenspan to describe the dot-com bubble of the 1990s.
The other way to look at the onset of a recession, or a market panic, is a shock of some kind. The oil price shocks that set off the 1973 and the 1981 recessions, for example. And the bursting of the housing bubble that created the 2007 recession.
What should we expect now? No one ever really knows. But there are signs. Look across the EU and the fact is many workers are not benefiting from the bloc’s economic recovery. Compare GDP in the EU to wages and the latter is declining, which means the gains are going to corporate profits. Wages in not just the southern European nations are lagging compared to the pre-2008 crisis period but also in the U.K. This is playing out in rising social tensions. A few weeks ago climate activists occupied London’s Marble Arch evoking the Occupy Wall Street movement. France’s Yellow Jackets aren’t giving up.
Fissures also exist in the financial markets. Corporate debt levels have doubled since 2008 and names rated BBB comprise approximately half of the investment-grade market. As long as the economy hums along and rates stay low this isn’t necessarily a problem. But one dislocation, one broad wave of downgrades, and the squeeze sets in. Defaults won’t be far behind.
With trouble brewing in our economies and the markets, we should be looking to our political leaders to prevent a squall from becoming a storm. But on both sides of the Atlantic, we are plagued by fractious politics that struggles to reach consensus on the problems that divide us. Opinions will differ about who’s a real “leader” today, but no one stands out anywhere in the world. Nature abhors a vacuum. If there is a crisis, economic or otherwise, we’ll need political leadership that can navigate us through the waters.
Montieth M. Illingworth
CEO and Global Managing Partner
May 8, 2019
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