Politics, beliefs return to dominate economics

The triangle.pngThe 10000 readers who downloaded the blog’s first Budget White Paper in December 2009, ‘Budgeting for a New Normal’, will remember the issues highlighted in the triangle above.

At the time, they were being widely ignored, as policymakers assumed that the economy would soon return to its previous SuperCycle.

Today, this optimism has been revealed as wishful thinking.

Instead, much as the White Paper feared, we have learnt that “Extended downturns are difficult times. We would all like the certainties of future growth to return. And I believe they will in time, but probably not as quickly as the financial community currently expects. Disappointment is part of the experience of extended downturns.”

The lack of attention has meant these issues have since become worse. And they highlight how the world is now moving away from the economic certainties that dominated the BabyBoomer SuperCycle:

• Then, steady economic growth led companies to focus on financial targets. The Shareholder Value concept was widely adopted
• Now, we are relearning that businesses cannot ignore the impact of politics and belief factors, when they come to make decisions
• Politics has led to the current impasse over the Eurozone crisis, and to lack of US progress on debt market issues
• Beliefs have driven geo-political issues such as the Arab Spring to the top of the agenda

All this means that the world is becoming ever more complex. New concepts such as Shared Value seem likely to become the main driver for future economic growth.

Equally, forecasting the future now requires robust scenarios to be developed, rather than simple straight line forecasts. As the White Paper also noted:

“Harold Macmillan, the former UK prime minister, summed up this dilemma when asked once about “his greatest worries”. He famously replied, “Events, dear boy, events”. This might be a good watchword for all of us, as we progress through the uncertainties of the current downturn towards the ‘New Normal’.”

The blog will discuss these issues in more detail in its annual Budget Outlook, to be published on 22 October. On Saturday, as usual, it will review the performance of its October 2010 Outlook, ‘Budgeting for Uncertainty’.