Not a bad Australian recession, and our Global industrial system

Australia is due to have a recession, and not a mild one, but maybe not as severe as the one the rest of the world is still lingering on. The signs are clear, mining capital expenditure decline (as they enter the production phase), demand tampering off with a Chinese Economy still waiting for a recovery in the west, that can give them a few years more for internal demand to compensate some of the lost exports. The Australian dollar adjusted in the markets after Reserve Bank outlook for rates cut and general economy worries. The signs are there but they would never be definitive.

For the generality of Economists when they call an official recession we probably have been in one for at least a semester or even a year, so we may well be living it already.

Why is this recession so different from the other ones, and why it is desirable for some sectors in particular?

Australia was not hit in full force by the GFC. Their big oligopolies, regulatory driven (like banks) or freely formed, largely remain the same. With little change in investment and organizational structures. The rest of the market represented by mid tier companies and SME’s are even further behind, with some of them not catching up even to the most basic developments in Marketing, IT infrastructure, communications, and logistics. The lag of productivity, capability, and people skills is now to close to about 5 years, or pretty much GFC before and after.

The 2008 crisis was a one in 70 years event, unpredictable, and with consequences that are beyond just the negative. On the brighter side, American and European firms are much stronger than before in terms of productivity, adoption of relevant technology, and skilled personnel. The GFC was a great fire in a forest that had accumulated too much dead material for many years, the fire then was understandably destructive, but leaving the forest open for the strongest of trees (established robust companies), or the firms waving the flag of innovation and adoption of radical changes to grow in new open land. Nothing motivates more a rapid change than the prospect of bankruptcy or insolvency for a Firm. Is in that situation that Technology played a very special role in the GFC, and will too, in case we see anything close to a recession for Australia.

Two key stages of a downturn to analyse.

First, the visible recession; This is a stage where decrease on demand and significant reduction of the employed population reduces available income of consumers. Visibly as a consequence of firms downsizing their operations, laid off’s, and general sentiment of the public about consumption. This is the side of the slowdown people can see and rationalize on the everyday. Second, the efficiency gain: After downsizing clearly redundant operations and costly projects, the best firms embarks in search for any delayed Technology upgrade that can significantly get them ahead by when the economy picks up again. This second round can impact even more expenditures, jobs and old partnerships compared to the first one, however for the public is just part of the general downturn. The key difference between the two is that the first round does not generate gains in productivity, while the second one does, with some interesting consequences for the aggregate of the economy.

A few of the things the GFC was a great catalyst for investment: shared IT infrastructure (cloud), marketing automation (data driven, big data), remote networking and communications (Global shared service centers, digital outsourcing), manufacturing automation (robots, M2M protocols), and many others shared that something in common. When aggregated as a whole, they rely less on human operation, they are usually commanded by just a few or one vendor Globally, and they require less investment to run compared to previous generalized technology upgrades. In a more colloquial language, they are less human, out of firms control, and cheaper to run.

What are some of the implications?

For Technology firms in Australia, they should pay attention to this trend and start building the business cases, so CEO’s and CFO’s get ready their wallets for a massive Technology upgrade, with consequences in the payroll, that will wash out as just part of the downturn (media attention). Australian firms will be more competitive and regain strength from the crisis bringing a long needed boost to Innovation in general. Vendors and agencies will need to be smart not to miss this wave by contracting their operations themselves, and therefore losing a chance to sell their product at the best time possible.

However, that is brighter contrast to the Global economy impact of this trend. With a glut of workers skilled for jobs no longer existing, in industries in rapid decline or in route to dissapear. The biggest challenge for the current system will be when a tipping point is reached, and the industrial era paradigm of workers-consumers is no longer prevalent, largely substituted by machine-welfare recipients one. This creates several dilemmas about how beneficial really is the adoption of technology when the pace of change is much faster than what human society and skilled workforce can change. Perhaps, this is reflected in the prolonged and never reaching route to recovery in the US and Europe with gigantic deficits and structural unemployment difficult to deal with.

In past crisis, workforce and technology eventually catch up, and the new productivity gains are enough to generate new areas of employment for the young and the previously displaced workers. Time will test the fragility of the industrial system, and the premise of its survival. It might also be the witness of humanity’s evolution to a less prone to break alternative.

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