Thursday, 30 October 2008

Time and growth

In two opposing ways, time is affecting global growth.

The first is scary. So much of global growth is based on investment (50% of GDP in China!) that we are spending a huge proportion of our current efforts in hope of future return. The problem with future expectations is that they are incredibly volatile. Unlike ongoing present-day commitments or projects, our expectations of the future can easily change by 50% - in either direction - overnight. All it takes is a message in the media, spreading from one journalist or blogger to the next, and within a few days everyone thinks a disaster is coming.

If a third of everything we do is based on working towards potential future returns, and our expectation of those returns falls by half, suddenly most of that investment no longer seems viable. This is the terrifying prospect - imagine a 20% fall in economic activity within a year with all the multiplier effects that would have. Enough to stop you wanting to get out of bed in the morning.

Naturally I don't think it will be that bad. One reason is that expectations can rise as easily as they can fall. A narrative of hope can develop to show us why the future is still going to be great, and investment will return.

The other and more interesting factor, is the counterpart of time sensitivity. That is the lead time on investment. Fortunately, things still take time to build. Therefore people are already committed on long-term projects and developments which need to complete (because most of the money is already spent, so the cost of completion is justified by even a reduced future return).

In an extreme example, if all our projects take ten years to complete, we would have several years of continuing investment before seeing any real downturn. Of course we would then take years to get back up to speed again, so this phenomenon is not an unalloyed good. Happily there are a range of different lengths of projects - but in any case many firms have a sufficiently sustainable business to get through the next couple of years at least.

Maybe by that time we'll have figured out where this narrative of hope is going to come from. Perhaps an Obama presidency in the US will provide something; maybe it will be from another source. But humanity has a pretty good record in this respect.

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