The events of 2008 signalled the start of an extraordinary crisis. Few saw it coming and those who did were branded economic heretics.
In the economic winter that followed corporate management’s confidence in economic forecasting evaporated. No one knew when the economic spring would dawn so hibernation became the best strategy.
When management does not understand the risks it tends to inertia. So hibernation was accompanied by low levels of investment.
Most recessions are like this but this event was not a cyclical adjustment but marked a systemic discontinuity. There will be no return to the conditions experienced prior to 2008.
There are now signs that a new period of growth may be beginning and a more positive sentiment is beginning to emerge. No specific event marked the change. The return to growth came as a surprise. Few planned for it and most remain cautious. Recession fatigue may be a factor in the renewal of activity. The realisation that if you hibernate for too long you die may be another motivation.
Some companies are in reasonable financial health but others will emerge into the economic spring damaged in ways they do not, as yet, perceive.
Most companies that have survived have done so by reducing costs, building cash reserves and minimising investment. But this is not a strategy for progress.
Investment is now the major challenge for both governments and companies. Without a substantial and sustained increase in investment the resurgent economic activity will wither. Too much and the economy will overheat.
But the economic shock we have endured changed our world in ways we do not yet understand. So we must invest into uncertainty.
Resurgent economic activity is built on savings and debt fuelled consumer spending in the west and infrastructure investment in the east. Neither is sustainable over the medium term.
What is holding investment back is not the availability of funds but perception of risk the evaluation of which depends on confidence in forecasts which, in turn, rely on a the kind of continuity that the events of 2008 disrupted.
What we have learned is that our conception of risk as being confined to the frequent events that have arisen in the recent past is naïve. Poorly defined low probability events that have high impact are not only more likely occur than we imagined but are an emergent property of complex systems and our business environment has become a very complex network.
In these conditions investment will be characterised by three things;
1. Projects that offer a high probability of payback over the short run.
2. Projects that offer long term income streams that transcend the next economic cycle.
3. Intolerance of the risks that prior to 2007 were considered irrelevant because they were very improbable (the so called Black Swans or Fat Tail Risks).
The issue now is how to embrace unpredictability and especially the ‘dark risk’ associated with the uncertain structure of a new economic cycle that is only weakly related to the patterns of pre 2008.
Anthony Holmes is the author of Managing Through Turbulent Times.