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The financial crisis masks fiscal over-stimulation

Principal sources of annual media growth

The US economy was in a political cycle in 2004, as the government used fiscal spending to stimulate the economy. Rates of growth in US government spending were back to where they were 35 years ago at the height of the Vietnam War. In 2005, the tragedy of Katrina and the continuing demands of the wars in Afghanistan and Iraq continued to fuel government spending. In 2006, the latter conflict continued the acceleration in government spending.

It is no accident that governments in many countries are the largest advertising spenders: ministries use marketing to reinforce their policies and build electoral popularity. The problem is that the US economy is almost entering another Reagan era with fiscal deficits, a continuously weakening dollar, trade imbalances and the threat of inflation now starting to become a reality. Isn't the country's currency really its stock price?

Perhaps for political reasons, the incumbent Administration failed to deal with the twin fiscal and trade deficits, and the dollar weakened. They chose not to raise taxes and Chairman Bernanke did not hike interest rates even further.

All this was thrown into sharp relief by the sub-prime, insurance monoline, private equity and house price crisis that hit hard in the third quarter of 2007. Everyone but Goldman Sachs seemed caught unawares. Economic policy is in sharp reverse, with massive injections of liquidity and significant lowering of interest rates being the cornerstones of the new economics, as banks continue to refuse to lend to one another and third parties.

The result: the danger of increasing inflation, although not a bad thing for our clients (or us), giving them increased pricing flexibility. Significant increases in input costs, particularly commodities, in this inflationary environment can be passed on through increased prices to the retailer, who can then in turn choose to pass them on to the consumer. The risk for manufacturers is pricing themselves out of categories, particularly against retailers' own labels or in emerging markets where local competitors focus on price and distribution. The impact of the crisis has so far been limited in the real world. The US consumer seems to be under most pressure, and house and retail markets most affected.

The issue remains whether increased corporate profitability and liquidity will stimulate a capital expenditure-led increase in activity, to counter the credit and liquidity crisis hitting the consumer. 2005, 2006, 2007 and early 2008 have so far seen a relatively soft landing, with a mild softening in the US in the fourth quarter of 2007, although the first three months of 2008 were alright for us. Corporate capital spending, however, remains sluggish – insufficient to fill the spending void caused by more sensitive debt-ridden consumers suffering tumbling property values.

We are still in a Sarbanes-Oxley, Eliot Spitzer-dominated (gone, but not forgotten) world, where CEOs last on average fewer than four years and CMOs fewer than two, and are constantly pressurised to return cash to share owners and hedge funds – themselves pre-occupied by short-term performance targets.

Hedge funds account for more than half of trading volumes on both sides of the Atlantic and even so-called long funds have quarterly performance targets. Perhaps that is not an environment where anybody wants to take risks or focus on the long term. Why take chances and be fired? Better to continue receiving substantial compensation until you retire in three or four years. Or explore the seemingly safe haven of private equity, which is rapidly becoming the largest employer in mature economies, where difficult decisions can be taken and risks explored quietly in private. Blackstone and KKR already employ over 800,000 people each and the private equity partnership-owned Neilsen, under ex-GE man David Calhoun, is making bold decisions and changes in market research in private. Lucky him. He will get there faster than in a publicly-owned environment.

Principal sources of annual media growth
Absolute contribution in %

  2006 2007f 2008f
North America 32 20 23
US 28 18 20
Latin America 9 9 9
Brazil 5 6 6
Western Europe 21 22 17
Central & Eastern Europe 12 14 12
Russia 6 8 6
Asia Pacific (all) 21 30 35
North Asia 14 17 23
China 18 15 21
ASEAN 2 3 3
Middle East & Africa 5 5 5

Media growth indices relative to GDP growth
Media: GDP growth rate parity = 100

  2006 2007f 2008f
North America 121 90 117
US 116 90 114
Latin America 124 115 113
Brazil 188 158 174
Western Europe 87 91 74
Central & Eastern Europe 105 124 101
Russia 100 138 95
Asia Pacific (all) 84 101 109
India 58 68 70
North Asia 103 95 123
China 158 96 132
ASEAN 57 89 75
Middle East & Africa 89 106 78
World 93 94 116

Source: GroupM
f Forecast