I’m sure it hasn’t escaped your attention that one of the world’s biggest investment banks collapsed ten years ago this week. Such was the magnitude of the crisis, that it still feels like we’re in the midst of the fallout and may be so for a generation.
We usually come back after summer with a back to school review. In this week’s blog we’ll carry on that tradition, but this time we’ll look back in order to look forward. What can the last decade tell us about what comes next?
Where were you on 15 September 2008?
The exact moment when the global financial crisis (GFC) began is a matter of some dispute. But there is very little dispute over its most seminal moment: 15 September 2008.
I was with colleagues walking to the office along Shad Thames (across from the City) when the news broke. Lest we forget how difficult the next few weeks were…. Merrill Lynch, AIG, HBOS, Wachovia and Fortis (amongst many others) were ‘saved’ with emergency deals. Seven central banks cut interest rates on one day. The UK effectively nationalised two of its biggest banks. European governments guaranteed bank deposits to prevent bank runs.
This wasn’t even the beginning of the end. The fallout from this crisis shaped the next ten years – and will no doubt shape the next ten. Which is why in the rest of the blog I want to take a long view to think about what the last decade can tell us about what could come next.
From ‘whatever it takes’ to a few dollars less….
I hesitate to draw straight lines between the events of 2008 and today – but monetary policy presents the literal exception. Frankly, a decade on from the last recession, we might expect to be in a new one. Instead, it’s a measure of the depth of the GFC that we’re only just emerging from almost a decade of flat-line policy, with central banks’ balance sheets still vastly enlarged.
A central bank school report card would make interesting reading. Rate rises in the UK in mid-2007 and Eurozone in 2011 look incongruous in hindsight. Quantative easing has benefited the asset rich, leaving behind the asset poor. Then again, it’s hard to think what else would have steadied the ship and is it central bank’s role to even out distorting effects? (More on that anon). It’s also hard to issue the final grade in mid-cycle – which brings us back to this ‘term’.
Because the next year – arguably the next decade – will be dominated by how well central banks ‘normalise’ policy. Everything points to the neutral* rate being lower than before – for reasons only partially related to the GFC. But, the journey to even this lower rate is looking tough. Leverage is still high – globally higher than pre-crisis. Volatility is rising. Even moderate US tightening is proving problematic for domestically-troubled emerging markets that have borrowed heavily in dollars in the last ten years.
We’ve been here before in the Taper Tantrum of 2013. Why this could be different comes down to stronger Fed intent; greater FX dollar funding – even in the last five years; and the shift in US policy – especially trade. US interest rate rises stem from US growth, but rising tariffs offset this impact. Meanwhile, tax cuts incentivise domestic growth and the return of US capital. Slower Chinese growth is big exacerbating factor.
Which is why the spotlight now falls on the impact of US rate rises on debt markets in general and on nations like Turkey more specifically. It’s also worth keeping in mind how much headroom the central banks can create in interest rates and their balance sheets before the next recession. Not it’s necessarily imminent; but there’s little more inevitable than the next downturn.
*The neutral or “Goldilocks” rate of interest is the theoretical level that allows stable economic growth without excess inflation.
From recession to moderate growth
It was a long slog back to growth and scars remain. The UK isn’t alone is being still less productive than before the crisis – despite the massive technological advances in the intervening decade. A recent McKinsey report lists four reasons why UK productivity has remained weak since the crisis: the financial sector’s “boom and bust”, strong employment growth, weak investment and uneven “digitisation”. And running through this is the theme of uncertainty, which has encouraged the retention of relatively cheap labour over investment.
Since the recovery in 2010, UK companies have contented with the Eurozone crisis, three general elections, tantrums and an oil price crash. But arguably they now face a bigger risk. Again, I hesitate to draw a straight line back. The current potent soup of voters concerns also has its roots in globalism and robotics – which obviously pre-date 2008. Even if governments played the perfect hand, households would have felt some pain – but could they have done more to spread the load? The coincidence of a surge in asset prices with a stagnation in wages has created an exceptionally uneven recovery across class, regions and generations. This in turn seems to have fuelled anger towards the status quo that has dragged the political consensus away from the centre in many countries – with profound effect.
So, we start the new term with relatively strong global growth, but also significant downside risks. Robust US growth comes with a side of higher interest rates, a rising dollar and worrying implications for a number of emerging markets. Moreover, the potential for further escalation in populism and trade wars looms large. When the global economy escaped from recession in 2009-10, the stimulated Chinese economy was growing at close to 10% versus a capital controlled 6% today. We cannot rely on this boost again.
And then there’s Brexit, which looms especially large after the summer break. It’s near-impossible to make any predictions when outcomes are so binary. By Christmas we’ll probably know if we’ll have a transition agreement in place next March; but it could be a hairy few months with fears played out through sterling.
From 3G to…?
Even in a benign scenario, moderate growth and moderate monetary tightening could prove challenging to companies that have been living on the borrowed time of an exceptional liquid credit environment – especially those that lack the capital to invest to keep up. Because, in 2018, if companies aren’t going forwards, they’re going backward at a very alarming rate.
I don’t think we can emphasise enough how much stress companies need to put on innovation. In 2008, the five largest US companies (by market capitalisation) were: Exxon, GE, Microsoft, AT&T and Proctor & Gamble. Of these, only Microsoft makes the top 5 in 2018. In 2008, no-one could have used WhatsApp (2009), Instagram (2010) or Snapchat (2011) on the newly launched iPhone 3G (for the first time with GPS). Today more functionality exists in a watch.
It’s interesting to note that there hasn’t been the same level of change in the list of the UK’s largest companies. Companies moving into the top ten in the last decade all manufacture consumer products – a story in itself. The lack of technology incursion could reflect the UK’s strength is as a creator of new businesses. The UK remains one of the world’s biggest inbound destinations for technology M&A. But, we shouldn’t be complacent. Investing in digital processes is vital to improve UK productivity – and wages. Our future depends on it.
|September 2008||September 2018|
|HSBC HOLDINGS PLC||ROYAL DUTCH SHELL PLC|
|ROYAL DUTCH SHELL PLC||HSBC HOLDINGS PLC|
|BP PLC||BP PLC|
|VODAFONE GROUP PLC ●||BRITISH AMERICAN TOBACCO PLC|
|GLAXOSMITHKLINE PLC||GLAXOSMITHKLINE PLC|
|BRITISH AMERICAN TOBACCO PLC||ASTRAZENECA PLC|
|ASTRAZENECA PLC||DIAGEO PLC ●|
|RIO TINTO PLC||UNILEVER PLC ●|
|BG GROUP PLC ●||RIO TINTO PLC|
|TESCO PLC ●||RECKITT BENCKISER GROUP PLC ●|
|● Companies now outside the top 10||● Companies that joined the top ten|
We also know that companies that have invested and innovated have outrun the competition in the last decade. Which is why I expect to see many more innovative deals – almost whatever the economic climate. That’s innovation both in terms of companies moving outside of their established spheres and in terms of the way that they do deals – including more joint-ventures and partnerships to spread limited equity and access more talent and technologies.
As we noted here last week, companies need to keep thinking about how to future proof their business – and the last ten years offers plenty of chastening lessons.
How many of us had a Blackberry in 2008?