World faces 8 paradigm shifts in post-crisis era

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By Richard Dobbs and Alex Kim

The significance of the economic crisis from which the world is beginning to emerge cannot be overstated. We have just witnessed the first global recession since World War II (Exhibit 1). But it would be a mistake for businesses to assume that economic recovery will mean a return to business as usual.

CEOs need to understand, and incorporate into their strategy, eight paradigm shifts that together constitute a radical change in the business environment. Some of these shifts result from the global economic crisis; however most predated, but have been accelerated by, the downturn.

Debt and deleveraging

Cheap borrowing and growing debt levels have underpinned global economic growth for two decades. In the ten years prior to the global downturn, debt levels in many countries grew more than 4 percent faster than GDP. Although historically low interest rates mean that carrying this debt is currently possible, interest rates will rise and governments and households will need to deleverage.

Previous crises show that this process can take three to five years ― during this period economic growth is slowed. Corporations will need to recalibrate their strategies ― government will be cutting back on spending, and credit will no longer be cheap and plentiful. Business models such as credit finance and private equity need to be rethought.

Unemployment

Unemployment is back with a vengeance for the first time since the late 1980s ― more than 35 million people additional are without jobs around the world. The picture for youth unemployment is worse ― in Spain, for instance, this is running at 40 percent.

The McKinsey Global Institute (MGI) estimates that the United States needs to create 200,000 jobs a month for the next six years to return to its pre-crisis 5 percent unemployment rate ― a rate of job generation not seen since the boom that ran from 1983 to 1990. Not only will unemployment dampen global growth; it may also make doing business more complex. For instance, activities such as offshoring will face greater political and social resistance.

Declining demographic dividend

In the past, countries could count on both productivity and a "demographic dividend" resulting from growing populations and workforces, to deliver growth. But global aging will rein back worldwide growth in the years to come. For the world economy to deliver the same level of economic growth of the last 15 years, a positive step change in productivity will be necessary (Exhibit 2).

Shifting centers of consumption

The geographic focus of businesses needs to shift as the bulk of new consumption will come from emerging economies. The rapid urbanization of China and India, in particular, offer a massive new opportunity. The urban population in these two economies alone will grow by more than 600 million people over the next 20 years.

Substantial construction of infrastructure will be required. To meet urban demand, India and China between them potentially need to build new residential and commercial space equivalent to three or four cities the size of Chicago every year for the next two decades. Having focused largely on consumption in the United States and Europe, companies now need to surf the consumption and construction wave in emerging economies.

Living with currency volatility

Given growth in global trade, currency fluctuations can fundamentally change a country's corporate competitiveness. In the short term, capital movements are resulting in exchange-rate movements that are largely disconnected from economic fundamentals. MGI believes that companies need to prepare for an era of continuous and perhaps more pronounced exchange rate uncertainty, and learn how to manage their strategies when they involve large currency bets.

Aging but under-invested population

Aging is a global phenomenon and companies need to adjust their marketing and sales accordingly. By 2050, 35 percent of the population in mature economies will be aged over 60, a far higher proportion than the 15 to 20 percent share that many business strategies assume.

In Korea, more than one-third of the population will be 55 or older within a decade; the working-age population will decline from 24 million to 22 million by 2020, worsening dependency ratios. Goods targeted at older consumers will need to offer value for money, given the fact that many of those in this age group have chronically under-invested for their retirements.

The connected world

The IT revolution is entering a dynamic new phase that we call the "Internet of Things." Businesses need to brace themselves for a world in which every object is wired into the global grid. Sensors are being fitted to everything from roads, to items in retail stores, to pacemakers-revolutionizing how information is stored and transmitted.

Conservative estimates suggest that sensor networks and smart machine technologies will impact more than $3 trillion of spending over the next decade. The productivity, managerial, and analytical competitive advantage that companies deploying such technologies can gain are unimaginable.

Governments are back in business

The crisis has broken the consensus that governments should get out of the market. By necessity, governments have become significant owners of businesses ― in the United States, the government accounts for 28 percent of GDP from 20 percent before the crisis ― and they have a heightened interest in active policies to boost the growth and competitiveness of the private sector.

Such public interventionism has higher odds of success if executed in close collaboration with the private sector. The G20 Business Summit convened by the Korean President in Seoul later this year blazes a trail toward new forms of cooperation between public and private.

These eight global trends together offer businesses years of turbulent head winds. Only those that rethink their strategies to take account of the post-crisis world will thrive.

Richard Dobbs is a Director of the McKinsey Global Institute where Alex Kim is a fellow. Both are based in Seoul. The McKinsey Global Institute is McKinsey's business, economics, and technology research arm, and is funded by the partners of McKinsey & Company.