Predictions: The good news is that everything has happened before, the bad news is that today everything is much more complex

We know that there have been major recessions before, that there have been significant inflations, energy crises, and wars. More or less, we know which reactions were good and which were bad, and how everything ended. However, in the meantime, the world has become much more complex and now there are more unknowns in the equation. But it would be too simple if everything were ‘copy-paste’, so we have room for a little improvisation.

The end of the year is here, and along with summarizing what has happened, both good and bad, plans are being made for the next year or years. It is the right time to start thinking about what will happen in the near, but also somewhat distant future. Man is the only being that takes forecasting as a weapon or means of survival. Forecasting is not simple. As physicist and Nobel laureate Niel Bohrs says: ‘Forecasting is difficult, especially when it comes to the future!’ However, someone has to do it. And we humans do it to survive. And we do it in the only way we know, which is to look into the past and then create models for the future. Sometimes it makes sense, and sometimes it does not. Because history does not repeat itself in exactly the same way. However, when we look at a long enough term, we cannot help but see some patterns that repeat. Even in the short term, in the alternation of night and day, with quite a high degree of certainty we can predict that after night comes day and that after rain the sun will shine.

Given that we live in interesting times, it is important to think about the future so that we can make the best possible decisions. Recently, I had an interesting online panel with international professionals and leaders in supply chain management, on the topic of ‘Thinking in the Long and Short Term’.

Long Waves

Among other things, we compiled a small overview of important events in the past that give us perspective on the cyclical nature of the world and business. Thus, we see that there are annual cycles in which the seasons alternate, and depending on climatic specifics, we can predict and prepare for certain extremes. Many, on the other hand, neglect cycles such as the alternation of business cycles, which are also inevitable and need to be taken into account. Although we learn about this in economics faculties, we forget that in capitalism, prosperity and recession inevitably alternate. These cycles alternate every five to ten years, and that is a normal, natural course. The problem arises when these short cycles are artificially smoothed out, as has been the case in the last five years.

If this happens, long-term economic cycles come into play, those of fifty to seventy years, which were recognized by Nikolai Kondratijev and defined in his book ‘Long Waves in Economic Life’ from 1925. His concept of long waves brings the realization that capitalism is a long-term stable system because it ‘irons out’ short-term imperfections. Because of these scientific claims, he ended up in a gulag and was executed in 1938. So, if we look at some cycles such as the period since the last major inflation, that of the 1970s, which was fifty years ago, or since the oil shocks, also in the seventies, then we see what Kondratiev meant. We can go even further and notice that the last major recession (before the one in 2008) was in 1929, and we too begin to notice cycles, or waves.

As I mentioned, the human being is one of the few that has long-term personal, but also organizational memory. This may be our only weapon for survival on Earth because based on past events we can construct models and scenarios for the future. And that is good news! The good news is also that there are very few new things under the sun. So we know that there have been major recessions before, that there have been significant inflations, energy crises, and wars. More or less, we know which reactions were good and which were bad, and how everything ended. The bad news is that the world has become much more complex in the meantime and that there are more unknowns in the equation. But it would be too simple if everything were copy-paste, so we have room for some improvisation.

Demographic Signs

In one of my previous columns, I wrote that one should not listen to advisors who are younger than sixty years because the problem with long cycles is that they do not manifest in one generation. To predict long-term trends, we need to look far into the past, but also notice signs of the times such as demographics, migrations, and so on. Peter Drucker, the management guru and one of the greatest thinkers of the twentieth century, stated that if you want to predict the future and business, you just need to read demographic statistics and follow demographic trends.

When it comes to long trends and demographics, then much becomes clearer. Many feared a population explosion on Earth and set limits to growth. However, it is now becoming clear that the global population may continue to grow until 2050, after which it will begin to decline. Europe is aging, China is also aging, and population growth is slowly stagnating; India will soon surpass China and become the most populous country. Africa will become the new China in terms of population growth and economy. Africa as a whole is approaching a population of one billion and has a predominantly young population.

Inflation, Raw Materials, Energy

Although it is now widely discussed that companies will start bringing production back from China (backsourcing or nearshoring), China has so many installed capacities that this will not be possible to replace in the short term, and perhaps not even in the medium term. At least not significantly, especially since Europe is now having problems securing enough energy for existing capacities. However, at a somewhat lower level, there is already a noticeable increase in production from local suppliers in Europe (which is why even in Croatia, exports are slowly but surely increasing). This is the opportunity we have been waiting for since the pandemic, and now it needs to be seized.

It should be noted that in the short term we will be troubled by a thorn called ‘inflation’, supported by problems in energy supply, but also other raw materials. It comes to us in a package with low growth due to rising input costs of materials, but also labor (theoretically called ‘stagflation’).

What It All Comes Down To

None of this is so new and it is not such that we have no experience with it. We have fought against inflation worldwide before (we in Croatia have experienced hyperinflation), and Japan, for example, has been struggling with stagnation and low growth for decades. The answer to these challenges is concepts for cost reduction such as lean management and innovations that require work on relationships with partners (whether customers or suppliers) and employees.

In fact, it all comes down to cost reduction and relationships with people. We have rediscovered that the lean concept is not dead and that we need to eliminate excesses and costs from processes through innovations, technology, and automation, as well as process rationalization. On the other hand, we need good relationships with employees because we need inventive, active, and satisfied workers. Perhaps we forget that partners (suppliers and customers) are also people and that we need to continuously develop good relationships with them, as we saw during the pandemic, lockdown, and disrupted supply how important those relationships are.