Economic growth has shrunk to a frustrating new normal

The world is bumpy. The idea of a flat, globalised planet worked rather well for business during the 80s, the 90s, and a fair portion of the 00s, until 2008. Now economic growth, historically three to four per cent, has shrunk to two per cent; the new normal.

How is it possible to lead a business to growth, if the climate stays like this for the foreseeable future? Can the mid-market still thrive?

From an American perspective, yes, it can. In an article published in Time magazine’s August 20th edition entitled “Go glocal”, Rana Foroohar announces a new era: localnomics. It means that high energy prices, political risk, and technologial shifts are bringing business opportunity back to the U.S.

But the idea that business is coming back home doesn’t only apply to America. Embracing everything local, fostering job creation at home, and ceasing to rely on other markets is just as important for the UK, as a double-dip recession and a crumbling euro zone is pushing the nation’s mid-market back to safer grounds at home.

Are we going glocal? We looked at Foroohar’s five localnomics rules.

1. Hometown bankers know best

The finance industry “greased the wheels of globalisation,” writes Foroohar, it “ruled the world.” She is speaking of the incredible power the finance industry held over the United States during the Great Moderation period, from the mid-80s until the financial crisis hit.

Banks represented some 30 per cent of total corporate profitability in the U.S., a number that’s only slowly starting to fall. Cries for a safer financial system are growing louder and Foroohar expects that the erstwhile so powerful insitutions will soon be broken up, forced to hold more capital, and to lend.

What about the other side of the Atlantic? Not that UK banks wouldn’t have enough on their plate right now. Today, seven banks which include HSBC, RBS and JP Morgan have been called by U.S. regulators to confess and pay up for their roles in the LIBOR rigging scandal. It’s alleged other banks colluded with Barclays to systematically rig interbank borrowing rates.

Is playing it local the next step for UK banks? Staying small and more connected to their local communities sounds like the way to a more trustworthy financial system. Especially one that’s recently earned its most treacherous, undependable reputation in decades.

In mainland Europe, as Foroohar points out, banking is “balkanising along national lines.” Decade-long cross-border integration of banking underscores a lack of faith in the euro, and the euro zone as a whole.

2. Manufacturing matters

In the new localnomics finance will have to duck and stay small. The centre stage is free for a new leading actor and that, so Foroohar expects, is manufacturing.

Welcome the new global growth champion. Manufacturing’s share of global output is at 17.4 per cent, the highest it’s been in a decade. Government support has driven the sector in China and the U.S. towards a boom. A weaker dollar, competitive global wage rates, the rise of emerging markets, and a thriving demand in shale gas and oil did their fair part in driving it forward at high speed. Local manufacturing hubs are the new star in the sky.

“Manufacturing is politically very important because it’s one of the few areas of the economy that is creating solid middle-income jobs,” writes Foroohar.

Here in the UK, we’ve been through weeks of tired discussions about a potential manufacturing downturn. Studies and reports about the state of the industry are mushrooming across the country, promising the best and the worst outlooks over the coming year.

We are in a double-dip recession, with the euro zone on the brink of following us after GDP across the 17-nation bloc fell by 0.2 per cent in the second quarter of this year; bad news for export, a main driver in the upsurge of manufacturing.

“Historically, it takes a little longer for the slowdown to cascade its way down the supply chain and to the smaller companies,” explained David Caddle, MAS area director. And we’re feeling that.

Problems in the sector are certainly visible. Investments are falling and demand is staying static. The aspirations, however, are unchangingly high: the UK’s mid-market manufacturers want and expect growth.

Two-fifths of companies are currently bringing production home for fear of natural disasters and economic turmoil abroad, a survey by the Engineering Employers Federation (EEF) found. Both sides of the Atlantic are taking the same path: we’re staying home, because it feels like the safest place to be.

“So how to create more local hubs?” asks Foroohar. “Ensure access to a highly skilled labor force, connect educators to job creators, and help smaller businesses become suppliers to big firms.”

3. Blue collar jobs go high-tech

“It’s the 21st century – why are we working so much?” asked Owen Hatherley in a Guardian comment piece in July 2012. Shouldn’t technology have taken over in many professions which previously needed heavy manpower by now? Why are we still spending 12 hours a day on menial tasks?

The reality is that although cheap work robots have been employed for task such as welding in various plants, the number of human employees hasn’t actually decreased in the past few years. Their skill level has increased.

As Chinese workers are becoming more expensive Western employers are coming back home. But the erstwhile cheap labour jobs have become high-skill positions that require advanced training or a degree qualification.

The result? Companies are taking on a greater role in education. If we can draw a closer connection between companies and educators, between degrees and jobs, then we will be building a bridge over the skills-gap. It’s time to focus on building qualified mid-level employees at home.

Real Business columnists Charlie Mullins discussed the skills-gap in his recent column, “The London Olympics legacy for business”. It’s the greatest threat to industry, he feared:

“The challenge for politicians of all parties and responsibilities is now to put the sniping to one side and take their own inspiration from so many of the Olympic athletes; to act as a team with the best interests of the country as their sole focus.“

4. Closer is faster, and faster is good

Is the world flat? World 3.0, a book by business school professor Pankaj Ghemawat, says it isn’t. By his calculations, exports account for only about 20 per cent of the world economy, cross-border foreign direct investment is only nine per cent of all investment, some 15 per cent of venture capital money is distributed outside home borders, less than two per cent of all phone calls are international, less than a quarter of internet traffic is routed across a national border, and about 90 per cent of the world’s people will never leave the country in which they were born.

Is the problem with globalisation that there’s too little of it?

Going global is still a complex process for the mid-market industry in the UK, and anywhere in the world. Not just shipping and pricing, but particularly the risk of building and maintaining a global supply chain is making international trade a difficult procedure.

Supply chain disruption is the greatest risk facing multinational businesses today, according to UPS. It’s safer to play at home. Regionalisation and localisation are the new trends, not only for mitigation of risk and economic reasons, but also for customers who prefer hyperlocal products.

Large multinationals are starting to find outsourcing to local small and mid-sized firms more attractive. “A recent study by the Center for an Urban Future found that small businesses that became suppliers to multinationals saw their employment go up, on average, 164 per cent within two years,” writes Foroohar. “For the large firms, it’s just smart business; many of the small and medium-sized enterprises they fuel will undoubtedly become customers at some point.”

For the mid-market, this means potential. Welcoming the multinationals home, ready for insourcing, means that a new path to growth is opening.

5. Local leaders must step up

How much can governments do to nurture local economies? China openly favours homegrown businesses and limits foreign capital. Do we have to get more aggressive about economic planning?

“Developing policies for localnomics is tricky, as many factors that support it – currency, oil prices, and even labour rates – can change quickly,” writes Foroohar. “In just the past couple of months, manufacturing in the U.S. has begun to soften a bit as Europe and emerging markets slow down.”

In the U.S. the question is, what will happen if regulations become too local? Will it become a state against state battle for short-term gains, a fight to outdo one another with lower tax rates and nonunion labour?

In Europe, where economic growth is largely reliant on a few capitals that generate most of the wealth, we’re necessarily in a multiplayer game. The McKinsey Global Institute recently noted that this might be the main reason for the difference in economic growth between Europe and America.

The UK, on the other hand, is keeping a safe distance. In that respect, are we already mastering localnomics? 

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