Archive for July 2009

Futurescape #3

July 8, 2009

 

July 8th 2009

Scenarios for Economic Recovery

 In our current work with clients, we are focusing on four main scenarios for how this downturn could play out. These all are plausible – if not equally likely – scenarios for how the key engines of the global economy may develop over the coming five to six years. As none of us truly knows how the next few years will play out, we cannot rely on a single set of assumptions. Instead, as governments, businesses, nonprofits and individuals we have to prepare for a range of possible scenarios and have strategies in place to deal with each of them. In the interest of brevity we have focused here largely on the economic outlook. Elsewhere we have expanded the scenarios to look at the impact of and implications for other factors such as the environment, energy prices, science and technology, innovation, regional development perspectives, social values and governance structures.  

 Scenario 1 – Love is in the Air – The ‘V’ shaped recession. 

Under this scenario, the recovery starts towards the end of 2009 / early 2010. Tough banking reforms and ‘bad bank’ models are adopted in most of the hardest hit economies. As many developing economies such as China and India manage to avoid recession, confidence returns to those markets more rapidly. A wave of new lending by developing economy banks from China to the Middle East helps improve the flow of credit in developed markets and simpler loan structures also help improve transparency and increase investor confidence in the borrowers.

In the more developed economies, despite concerns over the potential US$600 trillion of outstanding derivates contracts and a possible US$1 trillion of ‘at risk’ Eastern European debt, the system largely withstands the pressures, major new shocks, are prevented, only a few economies fail and confidence gradually returns to the real economy. While redundancies, wage cuts, short time working and other measures continue to be adopted for at least another year, most developed economies have turned the corner by the end Q1 2010. Public sector debt and the measures to address it act as a brake on the recovery but we see an eventual return to 2008 growth levels by 2013-14 at the latest. However concern is also growing in developed economies over how to deal with an ageing society, a growing pensions shortfall and the overhang of public sector debt.  

Scenario 2 – Suspicious Minds – The ‘U’ shaped recession. 

The much heralded economic decoupling is more evident in this scenario as China and India recover faster than much of the more the developed world, bringing a number of developing economies along in their wake. A strong outflow of investment funds from developed economy firms and funds into developing markets helps accelerate the recovery process as the investors seek to offset negative conditions in their home markets. China and India in particular see rapid development trajectories and are back to their 2008 growth levels by 2011 – driven by high levels of infrastructure spending and rising domestic consumption.

Most of the larger economies in Europe, the US and Japan don’t pull out until later in 2010 or early 2011 and do not get back to 2008 growth levels until 2015 or later. During 2010 one or two major new shocks emanating from the banking system serve to erode confidence and slow the pace of developed economy recovery. Developing economy banks don’t start lending to the developed world at significant levels until the second or third quarter of 2010 as they wait to ensure that the bottom has definitely been reached. Nervous consumers continue to emphasise savings over spending through most of 2010. Redundancies and other cost cutting measures continue through 2010 and into 2011 – with the public sector in some countries seeing some of the biggest job losses.  

Scenario 3 – Dancing in the Dark – The ‘W’ shaped or ‘sine wave’ recession.

Pent up demand, plentiful supplies of available talent and cheap asset prices lead to a short term recovery towards the end of 2009 / early 2010 as businesses and consumers start spending again. However a series of new shocks emerge from the banking system through 2010, bringing more bank failures, further nationalisations and rising bailout costs. The result is declining business and consumer confidence as credit dries up and increasingly negative sentiment dominates the media. By 2011 we fall back either into a much deeper and longer lasting recession or experience a series of oscillations in and out of recession over a four to five year period. The result is zero net growth over the period for Europe, the US and Japan. Corporate investment in particular shifts rapidly to selected developing economies until the end of 2010. Investment slows rapidly from 2011 onwards as firms around the world focus on conserving cash and batten down the hatches for a prolonged period of uncertainty.   While China and India don’t actually fall into recession, growth rates fall to 3-4% as the collapse in demand from Western markets takes its toll along with a rapid decline of confidence and negative economic outlook in many other developing economies. 2010 is the year of the Asian takeover as cash rich Chinese and Indian firms in particular acquire businesses cheaply across global markets. Country bankruptcies happen more frequently. Redundancies are commonplace through to 2012-13. Confidence only really starts to return once consumers have adapted to a lower income lifestyle and investors and businesses start to accept they are operating in new era of lower profit margins. Particularly painful restructuring of state and company pension funds and rolling back of pension commitments lead to high levels of public unrest and even bring down some governments. Eventually the 2009-10 stimulus package investments in infrastructure, education and green technologies start to generate new economic opportunities and yield new jobs.  

Scenario 4 – Road to Nowhere – The ‘L’ shaped recession.

In this scenario, we go into a long and deep downturn in Europe, the US and Japan with only feint signs of recovery by 2014. China and India could well dip into recession and many developing economies would fail. Small scale inter-country conflicts would be highly likely in the developing world and in parts of Eastern Europe. Company failure rates of 25-30% and unemployment of 25% are experienced in some economies. Huge levels of debt default by countries, corporates and individuals generates further economic uncertainty. The recovery when it comes is not uniform. A combination of massive cuts in public services, higher tax rates, business support grants and cheap loans are all adopted as measures to help stabilize finances and encourage growth. Pension systems are reformed and payments are scaled back. Growth is driven by new technologies, processes and business models in areas such as green technologies, food production, infrastructure and education. A new breed of low cost, low price businesses emerge in every sector.  A simplified and highly regulated banking system evolves with a clear legal differentiation between consumer banks and commercial banks. The complex investment banking products, securitised debt derivatives and hedge fund structures have all but disappeared as the new mantra is of one of control, simplicity and transparency.    

Responding to the Scenarios We know that in reality the recovery won’t quite reflect any of these scenarios. However the aim is not to predict the exact trajectory of recovery but to paint a range of possible pictures of what it could look like. The challenge for leaders and individuals is to assess each scenario (or develop your own) and determine what your response would be before the event rather than while it is happening. We’d be fascinated to hear your views on what the recovery scenarios could like and the kinds of strategies you see as appropriate in each case.  

About Fast Future Fast Future is a research and consulting firm which focuses on helping clients anticipate and develop innovative responses to the forces, patterns of change and ideas shaping the future. To book Rohit for a speech or workshop, or to discuss your research and consulting needs please contact rohit@fastfuture.com or call +44 (0)20 8830 0766   

Forthcoming Dates for your Diary   This is a selection of ‘future focused’ events that we think could be of interest. Those marked with an R are the ones where Rohit is speaking and / or chairing the event. We’ve had to take the weblinks off as this seems to cause problems with some firewalls.    

July 15th – 16th, 2009 World Technology Summit & World Technology Awards, New York, USA. Cost $995 – $1,650 

July 21st – 24thTED Global, Oxford, England. Cost $4,500   

September 18th – 20th (R), Get Inspired – International Association of Facilitators European Conference, Oxford, England. Cost – IAF Members £592.25 / Non Members £649.75    

October 14th-16th (R), Visioning 20.20 – Escaping the Age of Stupid, 5th European Futurists Conference, Lucerne, Switzerland. Cost €1040 – 20% early bird discount for bookings before July 31st   

October 21st -24th, Poptech 09 – America Reimagined, Camden Maine, USA. Cost US$3,500   

November 5th– 6th (R), Courage! – 7th Annual European Food Service Network CEO Conference, Cologne, Germany.

The Bulletin, issue no.3

July 3, 2009

By Ian Pearson and Rohit Talwar. July 2009.

How Robust is your Economy?  

In this thought piece we highlight three questions which people in each country should ask themselves to judge the capacity of their economy to prevent and withstand future economic shocks.  

We are constantly being asked for our views on the economic outlook and on how the economy may evolve in the coming years. As stated in a previous newsletter, we believe that a spending dam-burst is imminent, but that doesn’t mean we are over the worst of the crisis. For example, the IMF tell us that only around half of a total estimated US$4.1 trillion of sub-prime losses have worked they way through the system globally. The IMF and OECD are also warning that the impending pensions crisis could have ten times the impact of sub-prime and the debt of rich G20 economies will exceed 100% of their GDP in 2010.   However, despite these growing risks in the ‘system’, not every country is equally affected and we believe there are many different scenarios for how the downturn and recovery could play out – with V, U, W and L shaped trajectories all plausible for different economies from where we stand today.   We believe you have to look at this on a country by country basis to assess the resilience of the economy to future shocks, judge the level of confidence among businesses and consumers and define your strategy for riding out the situation.

To help determine how resilient your own economy is to future shocks, we suggest asking yourselves the following three questions about your country:  

1.   Will the current regulatory system and the changes planned in the near future prevent your banks from creating crises such as the one we’ve just experienced?

2.   Do your governments now have better early warning systems and coping mechanisms to detect and deal with future banking crises while they are only weak signals?

3.   Does your economy have the financial resources to manage another bail out on the scale of the one we’ve just experienced?    

 

Preventing Coastal Erosion  

 In this article we propose an alternative approach to tackling coastal erosion around the globe which would also cut carbon emissions and reduce plastic levels in landfill and waste dumps.  

The latest nightmare environmental forecasts suggest that much of the UK coastline will be affected by severe erosion. Indeed, some parts of the Norfolk coast are already suffering dramatic erosion. The official policy is not to protect such areas, but to allow erosion, for various reasons. In areas where protection is needed, often, concrete blocks are dropped into the sea to absorb or deflect the wave energy.   A seemingly unrelated environmental problem is the disposal of plastic. Much is recycled now, but a lot still ends up in landfill sites or waste tips, which are filling up fast all over the world. Big concerns have also been raised over the potential for non-biodegradable plastic to remain in the environment for hundreds or thousands of years.   However with a bit of imagination, both of these problems could be tackled together. When plastic is recycled, it is gathered and compressed into cubes for easy handling and distribution. If these cubes were wrapped and weighted, they could be thrown into the sea instead of concrete blocks, solving several environmental problems at once. Concrete production consumes energy and produces large amounts of carbon dioxide, both of which would be averted. Raw material costs would be reduced since the plastic is waste and in plentiful supply. It would hang around in the sea for many years, and as the blocks accumulate, they would provide an artificial reef, before becoming a good base for reclaimed land, while reversing the erosion process. During this time, the plastic blocks would be locking up carbon, making the plastic ‘reef’ carbon negative, as compared to the carbon neutral recycling process. And of course, landfill would not fill up as fast.   A plastic reef could be used to effectively seal off a region of coastal sea, making it possible to use it as landfill for other kinds of waste without the danger of sea pollution. This would accelerate the creation of reclaimed land as well as creating more landfill capacity.   One major obstacle is that under EU law, it is currently illegal to dump plastic in the sea. At the same time, landfill is highly taxed. It would be very sensible to review both of these obstacles to make such solutions feasible, as there would be very substantial environmental benefits. It is ironic that laws designed to protect the environment are now the major obstacles to one environmental solution.      

 

Artificial Stupidity  

Here we highlight the risks of increasingly slavish reliance on artificial intelligence systems for decision making in domains ranging from healthcare to insurance.   Artificial intelligence continues to have ever-greater impact on our everyday lives, even though it is mostly behind the scenes performing tasks such as improving search engines, recommending music, finding the fastest route and so on. On a good day, an AI system can make as good a medical diagnosis as a GP. Indeed, many GPs now check their own diagnosis against an on-line expert system (a fairly basic but effective form of AI). However, doctors are still needed because their own human skills are able to obtain more valuable data from the patient by asking questions and noticing body language signals such as hesitancy, facial expressions and so on. This extra data can lead the doctor down new channels of enquiry and improve diagnosis.   Airport security too is starting to use AI to spot potential risks, by examining human behaviour, even the ways people walk, and their responses to questions. Such uses of AI, with appropriate precautions, are beneficial, improving our well-being while reducing costs. However, in spite of this progress, most AI is still very bad at understanding the world and offering good solutions. We all remember Microsoft’s paper clip ‘assistant’, which was often far worse than useless. The term ‘artificial stupidity’ arose to describe such low quality AI ‘solutions’.   Now a new, worrying trend is emerging, where people are forgetting to use their own judgement along with the AI, and just accepting the output without question, and using it as an excuse when it all goes wrong. It may in fact be due to our litigation culture. We are becoming familiar with stories of trucks getting jammed in corners on country lanes because drivers blindly followed their satnavs. More serious is the trend of doctors beginning to rely too much on AI instead of their own judgement.   Ian’s own personal experience a year ago highlights the pitfalls of becoming totally reliant on machine intelligence: “A doctor told me that the deep vein thrombosis I am certain I had (and I am no hypochondriac) couldn’t be one because there was 93% chance that I shouldn’t have one. A 93% chance is just that, no more. It is not certainty. But because I only had a 7% chance of having a DVT, I was sent home without any treatment, or any suggestion of a possible alternative cause for my symptoms. The effects afterwards correlated very highly with it having been a DVT, one of the 7%, but if I had died from it the doctor would have been seen to have followed the book and I would be just another medical statistic. My medical records still state that it was not a DVT, but that is something that was never actually checked.” Such abuses of computer systems are becoming much more common, and it is a dangerous trend. When ‘probably is’ becomes the same as ‘is’, we have a real problem.   Blind faith in computers appears to be increasing, with growing state use of computers and AI systems, and too few checks made on accuracy. When AI makes deductions from false data, then the results will be wrong, yet the consequences are just as real, leading to anything from a poor credit rating to death. Litigation threats increase the desire to have someone or something else to blame, the computer being an ideal candidate that we all love to hate. But unless we nip this trend towards blind technological reliance in the bud now, it will become a real threat, both to the benefits that can be harnessed from properly-implemented AI and to our lifestyles.    

Artificial Intelligence – Servant, Friend or Master?  

In this second article on AI we explore some of the alternative views on how humans and machines might co-exist in an increasingly artificially intelligent world.  

A fascinating session on the future of connectivity run by the Club of Amsterdam at the RSA in London on June 25th highlighted some critical challenges posed by technological advancement. The suggestion was that a combination of massive increases in processing power, communications speeds, bandwidth and machine intelligence were going to leave humans as poor relations to the computer systems which would run commerce and every other aspect of our lives. As futurists we’ve heard these discussions many times before but what’s interesting now is how the pieces are falling in place sufficiently to warrant real public debate on how we want to live in a world where literally everything from roads to our shoes could be web enabled and ‘intelligent’.   A vision was painted of the computers taking care of business while we enjoyed infinite leisure time and had 3D movies projected into our brains. This concept is actually taken a stage further in the forthcoming film ‘Surrogates’ – in which humans stay at home and life their lives entirely through their robot clones which represent them in the ‘real world’. At the debate, an alternative view was that AI systems would actually be harnessed to serve us better. Imagine the mobile phone come credit card that prevents you from making a purchase because you’d exceed your personal carbon limit or which encouraged you to pause or end a phone conversation because you were becoming too stressed.   For us, three critical questions arose from the debate. Firstly once artificially intelligent computers with a capacity for learning start to design other computers, would there be any mechanism to monitor or control what was happening? Secondly, how would society make the choices about the role of technology in our lives – or would it just happen through a continuous process of encroachment? Finally, what about the 4 billion on the planet living in genuine poverty? They cannot all become subsistence farmers with a mobile phone to help them find the best market prices. Will this group at the bottom of the pyramid simply be left to eke out a life as they do now, if not how could these advances in technology genuinely enhance their health, education and income prospects? Or would our leaders – human or machine – make still more drastic choices about the lives and value of the underclasses?