Major corporations and countries are making huge leaps in the dark in their efforts to pull out of the recession, writes TONY KINSELLA
ANCIENT CARTOGRAPHERS covered ignorance with beauty, using artistic images of dragons to fill unknown areas on their maps. We now face even more treacherous uncharted post-depression waters infested with real and potentially lethal economic, social and environmental dragons. Making the right choices and selecting the appropriate courses without the benefits of clear maps is a truly fraught process.
The bald figures are clear – our recession is as deep, and more universal, than its 1929 predecessor. The National Institute of Economic and Social Research says the UK economy shrank by 5.5 per cent in the first 18 months of this recession – almost on a par with the first year and a half of the 1930s slump. NIESR director Martin Weale said “the UK economy is now stagnating rather than continuing to contract at a sharp pace”.
The pace of collapse may be slowing, and a variety of indicators are beginning to send modestly positive signals. The OECD’s composite leading indicators showed a one point improvement for the euro zone in May – but were still down almost five points on May 2008. IMF chief economist Olivier Blanchard last week warned that although “the recovery is coming, it is likely to be a weak recovery”.
Bald figures can only paint in broad brushstrokes. Harry Truman summed it up well back in 1958 when he remarked: “It’s a recession when your neighbour loses his job; it’s a depression when you lose yours.” Fuller pictures tend to be more informative, but accordingly risk being more confusing.
A 13-storey office building stands empty at Untertürkheim, just outside Stuttgart. It is the headquarters of the Daimler Group, the parent company of Mercedes-Benz.
The group’s former museum next door has been subdivided into offices to house headquarters staff. This was meant to be a temporary measure while the headquarters building was being renovated, but those renovations are now on hold as Daimler lost €1.3 billion in the first three months of 2009.
Some 47,000 Daimler workers are on state-subsidised short-time working while the company withholds €280 million in staff bonuses due from its 2008 profits. With overall sales down 27 per cent, its smaller models, the Smart and the A and B classes, account for almost one-third of total sales and smaller cars have slimmer profit margins.
In this Daimler rather resembles the world’s major airlines which have seen global passenger demand fall by just over 11 per cent in the year to March. The really painful bit is that much of this fall is accounted for by far fewer of the highly profitable first- and business-class passengers.
Daimler is betting its future on more efficient traditional engines and fresh capital. Its OM 651 four-cylinder diesel engine sits like a sculpture in its development unit. The OM 651 delivers the same power as an eight-cylinder petrol engine while using less than 5 litres per 100km (76 mpg).
Last March Aabar, an offshoot of Abu Dhabi’s International Petroleum Investment Company, paid €1.95 billion for just over 9 per cent of Daimler. This comes on top of the 7 per cent that was already Kuwaiti owned.
Another factory at Ayrté, near La Rochelle on France’s Atlantic coast, tells a very different tale. The factory’s 1,200 highly skilled employees work around the clock in three eight-hour shifts, seven days a week, designing, hammering and welding in an heroic effort to meet production deadlines on a order book which Georges Lacaze, the factory manager, proudly explains “is completely full until 2014”. Alstom’s rail works are hiring and training staff to deliver trams for Dublin, Algiers, Rotterdam, Paris, Lyon, and Toulouse among others. In another section of the factory, 80 double-decker high speed TGV trains are being built for France’s railway. These will come into service on its Paris-Lyon-Marseille route from 2012.
A third priority is the company’s new AGV railcar train designed to operate at 360km/h. The AGV prototype is now undergoing trials on a closed circuit in the Czech Republic, with the first production units scheduled to be delivered to their Italian purchasers from September 2010. This summer, for the first time ever, the Ayrté factory will not completely close in late July and early August.
Daimler, while not neglecting new propulsion technologies, is betting on massively improving existing ones. Its hope is that it can negotiate enough industrial partnerships and attract sufficient capital to take it through to a point where private car sales start to significantly recover.
Alstom, benefiting from France’s pioneering investment in high-speed rail systems, is betting on expanding sales of its products to largely state-owned customers.
Both hypotheses are equally valid but it will be several years before we can confirm the success or failure of either. Governments have been relatively successful, up until now, in containing the impact of the inevitable collapse of market capitalism gone mad.
Growing economies and those with significant foreign exchange reserves have launched major internal investment and external acquisition programmes.
The US, lacking an operational social safety net, has borrowed to fund domestic economic stimulus. European governments are all borrowing massively to maintain public employment and social benefits.
The latter two approaches will soon begin to seriously butt up against the limits of financial orthodoxy. If government borrowings are maintained, a new financial orthodoxy will have to be invented.
Reducing borrowings would mean cutting back on social benefits and reducing the size of the public sector, two elements which have kept our economies at least ticking over through these tumultuous months.
An unprecedented choice in uncharted waters, with dragons aplenty on all sides.