Global Economics Intelligence executive summary, September 2021 – Strategies: How to predict disruption when there is no such thing as normal

Today’s Newsletter from TextileFuture shares with you two items of actual interest.

The first feature is entitled “Global Economics intelligence executive summary, September 2021” and is based upon data and analysis in McKinsesy’s Global Economics Intelligence, giving you the latest facts and figures on their economic findings.

The second item is of strategic value and entitled “How to predict disruption when there is no such thing as normal”, it will provide you with further knowledge on how to proceed in anormal times.

We hope you find these interesting readings in a compressed form. Have a successful week!

Global Economics Intelligence executive summary, September 2021

The data and analysis in McKinsey’s Global Economics Intelligence are developed by Alan FitzGerald, a director of client capabilities in McKinsey’s New York office; Krzysztof Kwiatkowski, a capabilities and insights specialist, and Vivien Singer, a capabilities and insights expert, both at the Waltham Client Capability Hub; and Sven Smit, a senior partner in the Amsterdam office. The authors wish to thank Richard Bucci, Fiorella Correa, Spencer Dowling, Pragun Harjai, Adrian Grad, Moira Pierce, Jose Maria Quiros, and Yifei Liu for their contributions to this article.

Rapid growth and strong demand bump against pandemic-related disruptions; energy prices surge, but long-term inflation expectations remain moderate.

Industry continued to expand in August, and forward indicators point to further near-term growth. The pace of growth slowed, however, as strong demand crossed pandemic-related disruptions; the global purchasing managers’ indexes (PMIs) for manufacturing and services in August were 54.1 and 52.9, respectively, compared with readings of 55.4 and 56.3 in July (Exhibit 1). Growth momentum remained strongest in developed economies, but economic data in India and Brazil were also positive. The results are consonant with the OECD’s composite leading indicators, which moderated slightly in August but continue to point to strong growth above prepandemic averages.

Among individual surveyed economies, most manufacturing PMIs were lower in August. China’s indicator even fell slightly below the expansion line (50), but in the United States and the eurozone, readings were still above 60, pointing to historically rapid growth. In the services sector, PMIs in India and Brazil point to fast expansion.

Economies and businesses experienced supply shortages in August and September, slowing production and stoking inflation. Most notably, demand and prices climbed for crude oil, natural gas, and thermal coal. In McKinsey’s latest executive survey on economic sentiment, respondents cited the pandemic, supply-chain disruptions, and inflation as their top three concerns. Among surveyed economies, consumer inflation is highest in Brazil (9.7 %) and Russia (6.7 %); central banks there responded with interest-rate hikes (to 6.75 % and 6.25 %, respectively). In the United States, consumer inflation eased slightly in August, to 5.3 %, but has been above 5.0 % for four straight months, a mark not seen since 2008.

Mainstream forecasts and standard indicators signal no longer-term inflation danger, however. At the September meeting of its policy committee, the US Federal Reserve kept its key interest near zero, though the bank did signal some tightening will take place in 2022. The OECD expects US inflation to settle to around 2.5 % in 2022 and drop below 1.5 % in the Euro Zone. The current TIPS spread—the difference in yields between Treasury bonds and Treasury inflation-protected securities—is signalling moderate inflation of 2.4 % to 2.6 % over the next five years (Exhibit 2).

Consumer confidence and retail sales continue to ebb and flow in counterpoint to the crests and troughs of COVID-19 waves. Most recently, consumer confidence indexes weakened globally and in many individual surveyed economies. Retail sales growth remained strong in the United States; elsewhere, it settled to within pre-pandemic ranges, except in China, where it slowed.

In the most recent data (for July), trade levels remain high, with values moving toward prepandemic averages. The CPB World Trade Monitor measured a retreat of –0.9 % in July, however, following the expansion of +0.7 % in June; the trade slowdown was centered in the emerging economies. The Container Throughput Index rose to 125.1 in July (123.5 in June); increased traffic in Northern Europe pushed this indicator up, while delays in Chinese ports held it back.

For most surveyed economies, unemployment rates are declining. In the latest data, the rate in the United States fell to 5.2 % in August (5.4 % in July); in the eurozone and Russia, to 7.6 % and 4.5 %, respectively, in July (versus 7.8 % and 4.8 % in June); and in Brazil, to 14.1 % in June (14.6 % in May).

The equities markets were mixed in September, with some indexes losing ground due to pandemic-related concerns and other disruptions. By the end of the month, the three major US indexes lost an average of 4.8 % over the previous 30 days. The US dollar depreciated against major currencies. Except for the equities VIX, where spikes continue, most volatility indexes remain on a downward course.

The pandemic is still very much a threat to lives and livelihoods the world over. The number of officially reported active cases of COVID-19 surpassed 19 million in September, the highest level recorded during the pandemic, while more than one-half million died from COVID-19 in August and September. 1 Vaccinations are helping to reduce the threat, but mainly in developed countries: 44.7 % of the total world population received at least one dose of a vaccine as of September 28, 2021, but in high- and upper-middle income countries the share is above 60 %, while in low-income countries the rate drops to 2.7 %.

McKinsey’s Global Economics Intelligence (GEI) provides macroeconomic data and analysis of the world economy. Each monthly release includes an executive summary on global critical trends and risks, as well as focused insights on the latest national and regional developments. View the full report for September 2021 here. Detailed visualized data for the global economy, with focused reports on selected individual economies, are also provided as PDF downloads on McKinsey.com. The reports are available free to email subscribers and through the McKinsey Insights app. To add a name to our subscriber list, click here. GEI is a joint project of McKinsey’s Strategy & Corporate Finance Practice and the McKinsey Global Institute.

www.mckinsey.com

How to predict disruption when there is no such thing as normal

Enhanced perception and thinking about risk in new ways can help leaders navigate tumultuous times.

By guest author Eric J. McNulty

We weren’t expecting that!”

“It happened so fast.”

“We never thought it would be this bad.”

These are the kinds of comments one hears more and more lately. Even the most seasoned prognosticators have found themselves unable to divine an increasingly diverse array of disruptions: a sophisticated cyberattack, a devastating hurricane, a sudden grid collapse, or a ship wedged in the Suez Canal. “We will be in unprecedented territory again and again,” Rachel Cleetus of the Union of Concerned Scientists told NPR in a recent interview. Indeed, these days are predictably unpredictable.

The two groups within organisations that I think of as being charged with helping businesses prepare for such turbulence are the risk team and the business continuity team. Unfortunately, neither is well equipped for the unprecedented. People in both of these areas deal with known and historic threats, and are essential in this regard. Yet the assumption underlying their function—that relative stability is the norm and disruptions are episodic—is becoming obsolete. Such predictability is increasingly an illusion. As a result, the risks facing organizations are becoming more confounding and complex. Executives need a different mental model to deal with them.

In 2019, I wrote about four trends I’ve been following for almost 15 years that suggest constancy is giving way to relative turbulence. They are climate change, rapid urbanization, a split between an older global north and a younger global south, and greater worldwide interconnection through travel, trade, and technology. Although the specifics of each of these factors is difficult to predict with precision, the overall direction is clear—they are classic “gray rhinos” (obvious and overlooked risks), snorting and ready to charge—and should inform any future-facing perspective. Further, these are not discrete phenomena. They are part of a complex, adaptive system with many overlaps and interdependencies that can trigger and amplify disruption.

A new mental model for assessing risk

To better grasp these challenges, I use a version of “shearing layers of change,” a concept usually associated with architecture. The term was coined by Frank Duffy, a British architect, and later updated and expanded by Stewart Brand in the 1990s. The core idea is that different components of a system change at distinct rates—in a building, for example, furniture can be rearranged daily, whereas plumbing and other core support systems can go years without change, and the exterior walls may remain fixed even longer. As long as those rates of change are predictable and constant relative to each other, one layer does not impinge upon the others. The applications of this model go far beyond buildings.

Brand iterated on Duffy’s concept a couple of times, eventually applying the idea of shearing layers to civilisation and positing six distinct elements (from fastest- to slowest-changing): fashion, commerce, infrastructure, governance, culture, and nature. The faster layers drive innovation, while the slower layers provide stability. When all is in equilibrium, the system functions well. If one layer accelerates or decelerates, however, significant disruption can ensue. In the structure analogy, imagine how problematic it would be if the exterior walls of your office building were reconstructed every two or three years.

We see this disequilibrium playing out today. The gig and sharing economies, cryptocurrencies, and social media platforms, for example, are driving the commerce layer ever faster while the creaky wheels of governance struggle to keep up. Nature, Brand’s most stable and slowest-changing layer, also is accelerating. I spoke with Alice Hill, senior fellow for energy and the environment at the Council on Foreign Relations and author of The Fight for Climate after COVID-19, and she said, “We’re rolling downhill from a stable to an unstable climate. We’re picking up speed, and we don’t know what is at the bottom.” The consequences of climate volatility will cascade through the other layers, upsetting long-established rhythms.

How to enhance risk perception

Although the shearing layers of change model doesn’t tell us how to deal with momentous change, it does prove useful in helping leaders frame risk in new ways so they can anticipate the possible sources and effects of upheaval. What effect does technology that’s evolving at a speed close to that of fashion have on your firm and industry? What fissures in our culture might be brought about by food, water, and housing insecurity resulting from climate change? Which business models persist only because no one has yet imagined an alternative to the status quo? What shift in conditions would make the time ripe for a latent innovation to emerge? Where are the opportunities and threats? And how can your business help solve emerging social and environmental challenges to help customers, workers, and communities flourish?

Another approach to leading through turmoil comes from April Rinne in her new book, Flux: 8 Superpowers for Navigating Constant Change. She suggests “running slower” as a way to enhance your perception and understanding of what is unfolding and enfolding around you. “Faster, harder” is not the solution to every problem. She writes, “There is an inextricable link between your ability to slow down and your ability to thrive.” What faint indicators of pending disruption might you spot if you were not “always on,” addicted to the immediacy of the present?

A third facet of the solution is to build ever-deeper connectivity throughout your organization’s ecosystem. Work to embed futures intelligence across the functions within your company and with external suppliers, customers, and others who might be positioned to see things you are missing. Always be testing your assumptions and questioning orthodoxies. This helps build foresight competencies to keep you anticipating shifts rather than reacting to them.

An increasingly uncertain future

Conditions in the world are such that turmoil and confusion are inevitable. Unfortunately, there is no Department of Business Discontinuity that can step in to rescue you. Nor should there be. Acceptance and understanding of the new “not normal” must permeate your organization if you are to dance with disruption rather than be overrun by it.

This feature was firstly published in Strategy Business.

www.strategy-business.com

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