Deloitte’s latest look at the global economy

The world appears to be awash in “black swan” events. That is, events that no one expected are happening with unusual frequency and are having an impact on the overall economic outlook. The two most notable black swans lately have been the uprising in the Middle East and the earthquake/tsunami in Japan. Both have the potential to influence the global economy. In our latest Global Economic Outlook, we address the impact of both events. As for the Middle East, the big questions revolve not around Egypt, Libya, or Syria, but around what might happen in major oil producing countries such as Saudi Arabia. The recent rise in oil prices reflects uncertainty about the future, not any current shortage of oil. As for Japan, we have suddenly been reminded that, despite 20 years of relatively poor economic performance, this country remains an important cog in the global supply chain – especially in relation to high tech products. Thus, the short term outlook for production of electronic gadgetry is problematic.

Why WEP matters: The UN Women’s Empowerment Principles – one year later

It is a universal maxim that there is strength in numbers. While it’s great when one company commits to investing in women—it’s even better when that number is 170. That’s how many CEOs have now signed the United Nation’s Women’s Empowerment Principles (WEP). And as evidenced by the UN’s one-year commemoration of the launch of WEP last month, that number seems likely to grow.

This event, where I participated as a panelist, took the importance of WEP to a new level. More than 150 executives attended the conference, from such well-known companies as Banco de Brasil, Calvert Asset Management, and Novo Nordisk. The UN Secretary-General, Ban Ki-moon, himself opened the meeting—and there were nearly as many men as women in attendance.

All of this underscored a palpable sense of urgency that seemed to pervade the conference. An urgency that the time to invest in women is now. Not in a year or two when the economy recovers. Not when the dust settles after various laws and regulations take effect, but now. If you want to grow your economy or business and stay competitive, you need to start taking the role of women in organizations and in leadership roles more seriously—and focus on intentional change.

Crossing borders through global investment and education

It is with great pride each year that Deloitte is represented by a delegation of leaders at the World Economic Forum in Davos, Switzerland, an independent international organization committed to improving the state of the world by engaging business, political, academic, and other influencers of society to shape global, regional, and industry agendas.

This year, Barry Salzberg, CEO, Deloitte LLP, and Robert Kimmitt, Independent Chairman of the Deloitte Center for Cross-Border Investment, provided their thoughts from Davos on important issues around cross-border investment and global education initiatives covered at this year’s Forum. We are pleased to share the perspectives of these two leaders from this important world event.

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1:14 - Barry Salzberg on his impressions of Davos this year

2:19 - Bob Kimmitt's takeaways from Davos

3:39 - Barry asks Bob: How has the nature of cross-border investment changed as a result of the global power balance shift?

4:35 - Barry asks Bob: How should companies prepare to execute a cross-border investment?

6:08 - Barry asks Bob: What new cross-border investment models have emerged as a result of the global financial crisis?

6:45 - Bob asks Barry: How do we ensure our young talent force has the skills to compete in the global marketplace of the future?

10:38 - Bob asks Barry: How can businesses, governments, and academia work to combat the talent challenge?

14:21 - Bob asks Barry: What can businesses do internally to develop leaders of the future?

Deloitte’s latest look at the global economy

As editor of Deloitte Research’s quarterly Global Economic Outlook I often struggle to find new things to say about the economy other than updating the outlook. In this quarter, my colleagues and I have chosen to look a bit beyond the horizon. While many economists today focus on the short term transition out of crisis and into sustainable recovery, one cannot help but feel that a bigger and longer term transition is under way.

Of course, things have been changing for some time. For the past 30 years, the big emerging markets have gradually increased their share of the global pie following two centuries of relative decline. But now, the process of catching up appears to be accelerating, and with dramatic consequences. This is most noticeable in the aftermath of the global recession.  As developed markets struggle to recover, big emerging countries are racing ahead—not only boosting their own living standards, but stimulating growth in the rest of the world. With much more rapid growth than the developed world, these countries have become significant players in the global economy. For the first time, their policies are of critical importance to everyone else.  Moreover, as they grow, their middle classes are rising in importance and attracting the lion’s share of attention from many of the world’s biggest companies. For the developed economies, this means managing a process of relative decline.

Consequently, this quarter’s Outlook spends a good deal of time focused on the changing world of emerging nations. Interestingly, the challenges they face are quite different from those faced by the developed economies. In the U.S., Europe, and Japan, the biggest challenges are maintaining decent growth and reducing long-term fiscal deficits.  In the emerging economies, the challenge is to keep the economies from overheating and generating serious inflation. Hence governments are struggling with balancing the threat of inflation with the need to maintain competitiveness in the global economy. 

The emergence of the emerging nations is but one of the many new realities that global companies face.  Indeed, “new realities” is the theme of this year’s World Economic Forum meeting in Davos, Switzerland. In the latest issue of Deloitte Resarch’s quarterly Global Economic Outlook, Elisabeth Denison examines some of the new realities of the global economy and their implications for global business. She looks at the changing dynamics of East versus West, private sector versus public sector, energy demand versus sustainability, and youth versus aging among other topics.  The rest of the report focuses on specific geographies including the U.S., Europe, Japan, the BRIC nations, and a new outlook on sub-Saharan Africa.   

Today, readers of newspapers and viewers of television news are probably perplexed by the arguments about exchange rates, inflation, deficits, and the like. If you want a bit more clarity on these issues, as well as a point of view from people who do nothing but follow these issues, I suggest reading our latest Global Economic Outlook report.

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Dr. Ira Kalish is Director of Global Economics at Deloitte Research, Deloitte Services LP. He is an expert on global economic issues as well as the effects of economic, demographic and social trends on the global business environment. He has authored more than 150 articles and reports on economic and consumer trends around the world.

The U.S. deficit - A moment of truth

Excessive deficits are an issue that has spread across the globe, and that will be a common topic at the World Economic Forum next week as well. Several G20 countries have had their debt already exceed 100% of their GDP—and we are already reading of the public and political issues that have occurred as a result. And in the United States, the problem is acute.

Some months ago, I had the good fortune of being appointed as one of the 18 members of the Bipartisan Policy Center Debt Reduction Task Force—referred to in the media as the Domenici/Rivlin Commission. This was one of two major deficit-related studies which were reported out late in 2010, the other being Simpson/Bowles.

Even with the 37 years I have spent in public policy and public administration while at Deloitte LLP, it was an extraordinarily eye-opening and, in some cases, troubling experience. Why? Because the U.S. deficit and cumulative debt have been rising at a level that is simply unsustainable. Based on our analysis, our U.S. debt will approach 100% of U.S. GDP by the end of this decade. And interest alone on that debt will likely exceed $1 trillion a year! Perhaps more disconcerting, we found that U.S. revenue will only be adequate to cover current Medicare obligations, current Social Security obligations, and interest in 2025.

Clearly action is required and there is not much time to waste. Why should this matter to corporate America? If Federal borrowing has to continue to rise, we will ultimately see the cost of borrowing increase as well, and with rising interest rates likely rising inflation. Addressing this issue over time will be important to both confidence in the dollar and the surety with which U.S. corporate leaders can make longer-term capital commitments.

The Commission considered several alternatives and ultimately proposed some specific recommendations. Of note, our task group reached unanimity on the recommendations. Also of note, were our plan fully implemented, savings to the Federal government would approach $29 trillion over the next 20 years. You may be interested in reviewing the final report, which is attached. And, again, this is obviously also a big global issue. For more insights on the global implications of the rising debt, please see the Deloitte Research report Red ink rising.

You certainly may ask what would lead me to believe that Congress would be inclined to do anything, even with a well-thought out plan in hand. That’s a very good question. One could certainly look at the 2010 election results and key platform positions of the winners to gain some confidence. It certainly is clear that most of the new members of Congress were elected in part based on their commitment to get Federal spending under control.

Regardless of one’s confidence—or lack thereof—we will soon have some hard evidence. The first real test is likely going to be when the current legislated Federal debt ceiling is reached this spring. That ceiling can only be raised by Congressional action, otherwise certain areas of the Federal government will shut down. It will be very interesting to see what program cuts and policy changes are negotiated in exchange for a commitment to support raising the debt ceiling.

It will be a fascinating issue to follow this spring!

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Bob Campbell, Deloitte LLP U.S. State Government Leader, has, throughout his 36-year career with the Deloitte U.S. firm, worked closely with government leaders to address and resolve critical policy, financing, and operational issues at all levels of government. He has worked extensively with leaders of major federal agencies and more than 40 states on projects touching nearly every area of government concern.

Exploring new forms of economic leverage

On the snowy streets of Davos this year, almost all conversations will touch upon, in one way or another, how our increasingly interconnected economy is irrevocably altering business models. And one characteristic of this change is in the manner in which companies create leverage for themselves.

We watch in disbelief as financial markets retreat and the investment banking industry morphs into something yet to be determined. We are witnessing the dark side of financial leverage. While “de-leveraging” has become the buzzword du jour, we may miss the real lessons of the current crisis and the real opportunities for leverage.

The lure and risks of financial leverage
Financial leverage is a powerful accelerant in growing markets. Companies can extend their reach far more rapidly by borrowing other people’s money. They can also generate much higher returns for the equity investors if companies have opportunities for profitable growth. This is especially true when companies operate in an environment with relatively low interest rates and significant growth in global liquidity, as we have had over the past decade or so.

At every level of our society—individual, firm, and government—financial leverage has proven very seductive. To give an idea of how seductive , the total amount of credit market debt in the U.S. in 1980 was about the same as our GDP; by 2007, it had increased to 350% of GDP.

But, as we are learning, financial leverage has a significant downside as well. And, while challenging enough at an individual company level, it becomes even more challenging in our highly connected global economy, as our current crisis illustrates. When many companies are highly leveraged, if one company runs into financial trouble, it can generate a domino effect as each company struggles to cover its debt obligations and puts pressure on the companies that have borrowed from it. This is the scramble to “de-leverage” that we are now witnessing. Cash is king and leverage, once worshipped as a god, now becomes the devil.

The arduous road to fiscal sustainability

This post was co-written with John O’Leary

States, cities, and many nations around the globe are facing an existential threat in the form of a massive fiscal imbalance between expected revenues and promised expenditures. Nations, states, and cities alike are bracing before previously unseen levels of debt and deficits, many in fact may be on the verge of bankruptcy.

Some are already feeling the effects of the wave of debt. The most notable example is Greece, but Spain, Italy, Ireland and Portugal are all dealing with serious fiscal distress, while countries such as the United Kingdom and the United States are looking at sobering forecasts.

States such as California, New Jersey, and New York are currently staving off insolvency thanks to federal largesse in the form of the stimulus package—and even with $30 billion in such “bailout” funds from Washington, DC, California was issuing IOUs in lieu of payment during the summer of 2009 and faced a $20 billion gap at the start of 2010.

Local governments from Vallejo, California (which declared bankruptcy in 2008) to Detroit are looking at a death spiral of tax hikes and population flight.

The underlying threat is something we call “The Gap.” The Gap is a twofold problem, consisting of a fiscal gap between revenue and expenditures and a performance gap between the way government currently operates and the realities of the new economy.