Three scenarios which way the world economy could go
think: act CONTENT special on the current crisis
The current crisis on the international financial markets has in recent weeks led governments, central banks and businesses to take action that would have seemed unthinkable even a short while ago. What can we expect next? And what can and must businesses do now?
To give some guidance, Roland Berger has condensed the wide range of possible developments into three scenarios. In scenario 1, the economy recovers quickly (we think this is quite possible). Scenario 2 assumes a recession is coming (which is how most people are currently thinking). Scenario 3 is a depression (which we think is not very likely). Business needs to be prepared for all three scenarios. This article therefore shows what businesses should do to deal with the crisis while at the same time leveraging the many opportunities the coming months will offer.
Scenario 1: Rapid recovery
The financial crisis will have a knock-on effect on the real economy, but this won't last too long or be too bad. Different areas of the world will be hit very differently: Europe's economies will suffer very little, and even the BRIC states will avoid the worst of the fallout. The US and Japan will suffer worse. They too will nevertheless recover relatively quickly again thanks to massive state intervention.
National and international rescue packages and emergency action by the central banks will be effective. So yes, the crisis can be overcome on a political level. Apart from the dip in growth in gross domestic product (GDP), the damage to the economy is containable. Unemployment worldwide will rise only slightly. In some countries that are heavily affected by the crisis and where labor markets are flexible (such as the US), unemployment will increase somewhat more strongly. In Western Europe, moderate wage settlements and part-time workers will keep the labor market flexible, so unemployment will not rise very much. Inflation will remain relatively low and disposable income will fall slightly. Consumers will keep on consuming much as they are today, buying some things sooner because prices are low.
In this scenario the crisis will last for maximum a year.
Scenario 2: Recession
The financial crisis will be accompanied by a real economic crisis (the second dimension). In other words, the financial crisis will have major repercussions for the real economy. Once again, the picture varies. This two-dimensional crisis will have a massive impact on the US and Japan. GDP will contract sharply in both countries, and both will recover only slowly. Europe's economies will shrink slightly while the BRIC states will keep on growing strongly, although less so than in previous years.
New rules for a reformed world financial system will be agreed at international level, but will be a long time coming. Besides launching short-term state and monetary policy rescue packages, many governments will try to support their national economies with economic booster programs. Though these can soften the negative effects of the crisis, there is a limit to how much they can do. Unemployment will rise – especially in the USA, with its relatively flexible labor markets. In Western Europe, on the other hand, unemployment will increase only slightly, thanks not least to moderate wage settlements and more part-time work. Inflation will fall and disposable income will shrink. Consumer confidence will be eroded and people will start to save more again. "Safe saving" will be especially popular in many Western nations.
It seems that this scenario is very realistic. The crisis will last for 1-2 years.
Scenario 3: Depression
The whole world economy will be hit badly. Global GDP will shrink for several years in succession, sometimes in double digits. No industry or country in the world will come off lightly. It may not be a rerun of the Great Depression after 1929. Even so, the symptoms of crisis will be much worse than any global economic crisis in the past seventy years.
It will be a long time before the banking sector gets back on its feet as it was before the financial crisis. Governments will take over a major proportion of the banks, but will have to be very restrictive about granting loans itself, as they too will be strapped for cash. Huge financial problems will be rife in the real economy. Many companies will go bust, sparking off a vicious circle of insolvencies, mass unemployment, depressed purchasing power, imploding demand collapses and further insolvencies.
Such a systemic crisis lasts 3-5 years.
The current crisis on the international financial markets has in recent weeks led governments, central banks and businesses to take action that would have seemed unthinkable even a short while ago. What can we expect next? And what can and must businesses do now?
To give some guidance, Roland Berger has condensed the wide range of possible developments into three scenarios. In scenario 1, the economy recovers quickly (we think this is quite possible). Scenario 2 assumes a recession is coming (which is how most people are currently thinking). Scenario 3 is a depression (which we think is not very likely). Business needs to be prepared for all three scenarios. This article therefore shows what businesses should do to deal with the crisis while at the same time leveraging the many opportunities the coming months will offer.
Scenario 1: Rapid recovery
The financial crisis will have a knock-on effect on the real economy, but this won't last too long or be too bad. Different areas of the world will be hit very differently: Europe's economies will suffer very little, and even the BRIC states will avoid the worst of the fallout. The US and Japan will suffer worse. They too will nevertheless recover relatively quickly again thanks to massive state intervention.
National and international rescue packages and emergency action by the central banks will be effective. So yes, the crisis can be overcome on a political level. Apart from the dip in growth in gross domestic product (GDP), the damage to the economy is containable. Unemployment worldwide will rise only slightly. In some countries that are heavily affected by the crisis and where labor markets are flexible (such as the US), unemployment will increase somewhat more strongly. In Western Europe, moderate wage settlements and part-time workers will keep the labor market flexible, so unemployment will not rise very much. Inflation will remain relatively low and disposable income will fall slightly. Consumers will keep on consuming much as they are today, buying some things sooner because prices are low.
In this scenario the crisis will last for maximum a year.
Scenario 2: Recession
The financial crisis will be accompanied by a real economic crisis (the second dimension). In other words, the financial crisis will have major repercussions for the real economy. Once again, the picture varies. This two-dimensional crisis will have a massive impact on the US and Japan. GDP will contract sharply in both countries, and both will recover only slowly. Europe's economies will shrink slightly while the BRIC states will keep on growing strongly, although less so than in previous years.
New rules for a reformed world financial system will be agreed at international level, but will be a long time coming. Besides launching short-term state and monetary policy rescue packages, many governments will try to support their national economies with economic booster programs. Though these can soften the negative effects of the crisis, there is a limit to how much they can do. Unemployment will rise – especially in the USA, with its relatively flexible labor markets. In Western Europe, on the other hand, unemployment will increase only slightly, thanks not least to moderate wage settlements and more part-time work. Inflation will fall and disposable income will shrink. Consumer confidence will be eroded and people will start to save more again. "Safe saving" will be especially popular in many Western nations.
It seems that this scenario is very realistic. The crisis will last for 1-2 years.
Scenario 3: Depression
The whole world economy will be hit badly. Global GDP will shrink for several years in succession, sometimes in double digits. No industry or country in the world will come off lightly. It may not be a rerun of the Great Depression after 1929. Even so, the symptoms of crisis will be much worse than any global economic crisis in the past seventy years.
It will be a long time before the banking sector gets back on its feet as it was before the financial crisis. Governments will take over a major proportion of the banks, but will have to be very restrictive about granting loans itself, as they too will be strapped for cash. Huge financial problems will be rife in the real economy. Many companies will go bust, sparking off a vicious circle of insolvencies, mass unemployment, depressed purchasing power, imploding demand collapses and further insolvencies.
Such a systemic crisis lasts 3-5 years.
