While the US economy is in stall mode despite a couple of Ben Bernanke boosts, and China is jumping all over its financial institutions to keep inflation in order, the pain in Spain is going to make things very difficult for the next few months.
Across the globe, the slow surge in consumer confidence will be hit heavily by expectations that the flow on effects of a Euro slowdown will rocket into China and then flow like a tsunami into a global cut in commodities and a resurgence in the price of gold as a hedge.
All this means that money is flowing like rivers into the Aussie dollar, making the prospects for small business exports that much more difficult, with investors expecting central bankers to manage global liquidity.
Whatever else smart companies do in the next few months, it is vital to take the longer-term view rather than worry about month-by-month interest rate movements.
We spent last year worrying about Greeks bearing rifts in the bankrupt nations market and country after country hauling back their deficits. Government debt and deficits in many countries are not sustainable, but the austerity remedies of cutting spending and raising taxes, may make matters worse by deepening already severe recessions.
Now we see that the Spanish banking system is bankrupt and seeking 50 to 100 billion euros, with little prospect of getting half of that. Interest rates on 10-year Spanish bonds hit 6% for the first time since January when Europe’s bankers were struggling with the Greek bailout.
With unemployment rates four times higher than those announced this week in Australia, Prime Minister Mariano Rajoy announced that the country would miss its 2012 budget deficit target of 4.4% of the economy (gross domestic product) and wanted to raise that to 5.8% of GDP. After complaints from other European leaders, the target was set at 5.3% of GDP. But this required more austerity in an economy in deep recession.
Economists at Citigroup expect Spain to need a bailout this year. They see a gamut of possibilities, ranging from a full-blown loan-for-reforms programme – similar to those for Greece, Ireland and Portugal, overseen by the European Commission and the International Monetary Fund – to a contingency credit line with more or less tough conditions attached.
“The trigger could be loss of market access on affordable terms, but is more likely to be that the ECB makes some form of a program for the Spanish sovereign a condition for it to continue to fund the Spanish banks, which are currently the main buyers of newly issued Spanish sovereign debt,” Ebrahim Rahbari and Guillaume Menuet wrote in a report.
Under these conditions, the smart path is very much a back to basics approach unless you are in the import substitution business or have incredibly deep pockets. The key to success lies in building trust in the upstream and downstream supply chains, being selective in officering quality products and building brand equity.
Dr Colin Benjamin is an entrepreneurship and strategic thinking consultant at Marshall Place Associates, which offers a range of strategic thinking tools that open up a universe of new possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship. Colin is also a member of the global Association of Professional Futurists.