From the Wires
Companies Banking on Quick Recovery Risk Making the Same Mistakes as Companies That Failed During the Great Depression, Says Boston Consulting Group Report
Study of More Than 60 Leading Indicators Worldwide Shows That Talk of 'Green Shoots' Is Premature as Global Economy Continues to Decline
By: Marketwired .
Jun. 15, 2009 12:01 AM
BOSTON, MA -- (Marketwire) -- 06/15/09 -- Chief executives risk falling into the same trap as those among their predecessors in the Great Depression who were too quick to call the end of the downturn, according to the findings of a report released today by The Boston Consulting Group (BCG).
In "Green Shoots, False Positives, and What Companies Can Learn from the Great Depression," BCG found that, for all the talk of "green shoots" today, most of the popular leading economic indicators show that the world economy is still shrinking -- if at a slower rate than at the beginning of the year.
It warns CEOs to guard against the kind of hasty optimism -- based on an excessive reliance on one or two promising indicators -- that undermined some companies during the Great Depression. In June 1930, after a stock market rally that saw the S&P regain 60 percent of its lost value, Herbert Hoover, the U.S. president, confidently announced that "the depression is over."
In a study of 61 leading economic indicators in five of the world's largest economies -- the United States, Germany, France, the United Kingdom, and Japan -- BCG found that only five are in the "clearly positive" category. Another 15 are in the "positive trend but too early to confirm" category. The rest are ranked among either those showing some deceleration in the rate of decline but no consistent upturn (36) or those continuing to show a consistently negative trend (5).
Although this represents an improvement -- 37 of the 61 indicators were ranked in the most negative category in December 2008 -- the report's authors conclude that there are few signs that the global economy is back on a positive trajectory. They warn that nearly half of all the indicators showing signs of an upturn are driven by monetary policy. Of those indicators that are not related to monetary policy initiatives, less than a quarter have shown any positive sparks.
Daniel Stelter, global leader of BCG's Corporate Development practice and coauthor of the report, said, "In recent conversations at companies the world over, we have detected a change in the mindset of many executives. Many seem to be adopting a more optimistic economic outlook. They tell us that they see 'green shoots.' But although government intervention means that we are unlikely to see the bank failures that contributed to the paralysis of the 1930s, we should nonetheless learn from President Hoover's hubris -- and take it as a warning to be cautious about any premature celebrations of the upturn."
Major Risks Remain
BCG's report, part of its ongoing "Collateral Damage" series of papers on the downturn, also points to a set of factors which suggest that, even when the green shoots do start appearing, the recovery will be sluggish.
-- The empirical evidence is discouraging: similar recessions have lasted seven quarters, on average
-- The deleveraging of the U.S. consumer has barely begun
-- Credit is not flowing yet
-- The banks have not been restored to health
-- The not-so-stressful "stress test": the U.S. government's stress test was more a negotiation than a true assessment of banks' health
-- Governments do not have unlimited resources
David Rhodes, global leader of BCG's Financial Institutions practice and coauthor of the report, said, "For us, the key issue is not the precise timing of the upturn but the nature of the recovery. We expect this upturn to be sluggish -- as with all upturns after a recession that is synchronized around the globe and preceded by systemic financial stress. And in a sluggish economy, trading conditions will be tougher, competitive advantage more important, and broken business models exposed."
BCG's "Collateral Damage" Series
Based on its long history of helping companies survive and thrive during global economic downturns, BCG created its "Collateral Damage" series, which explores the "new realities" of a world in crisis. The series is providing a big-picture analysis of the crisis as it evolves in different regions, countries, and sectors. It offers senior executives practical guidance for protecting their companies from the worst of the crisis and preparing them for economic recovery.
Current titles in the series include:
-- Collateral Damage: What the Crisis in the Credit Markets Means for Everyone Else
-- Collateral Damage, Part 2: Taking Robust Action in the Face of the Growing Crisis
-- Collateral Damage, Part 3: Asia, Advantage, and Action
-- Collateral Damage, Part 4: Preparing for a Tough Year Ahead: The Outlook, the Crisis in Perspective, and Lessons from the Early Movers
-- Collateral Damage, Part 5: Confronting the New Realities of a World in Crisis
-- Collateral Damage, Part 6: Underestimating the Crisis
To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or [email protected].
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com.
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