Page 90 - Accelerating out of the Great Recession

THE NEW REALITIES

of political pressure being applied by governments worried about
the cost of debt service on rapidly rising debts.” 11
The return of inflation would lead to a significant drop in
bond prices for governments and corporations, which would
imply much higher interest rates. This, in turn, would have a neg-
ative effect on the economy, potentially causing another recession
and increasing the risk of deflation. Central banks will have to
walk a very narrow line, and as they do so, the global economy
may experience a period of increased volatility of price levels.
Another factor affecting the inflation-deflation debate is the
price of raw materials, particularly oil. Given the structural fac-
tors of shrinking supply and increasing demand (especially from
the emerging economies)—even in a lower growth environ-
ment—it is quite possible that higher oil prices will become the
norm. But this is not likely to lead to inflation because, given the
weak economy, companies will not be able to pass on the higher
costs to consumers. Companies thus will face reduced profits,
and consumers, paying more for oil, will have less money to
spend on other goods and services—a recipe for deflation.
It is impossible to say how the battle between deflation and
inflation will play out in the real economy in the years after the
Great Recession. Even if inflation returns to the fore, the
chances are that deflation will make a regular reappearance, as it
did during Japan’s Lost Decade. This duality is a new reality that
managers will have to come to terms with in the years ahead.

■ THE VICIOUS CIRCLE TO SLOWER GROWTH ■

There is no doubt that the world economy faces a long period
of lower growth. As we stated in Chapter 1, real GDP growth

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