Devil's Advocate: Beware the dead cat bounce

Everyone may be saying the economy will turn, that things will just have to get better. But must they? Martin Brampton, director at consultancy Black Sheep, questions the assumed logic.

Optimists think the worst is over. Stock markets plunged after 11 September but now every major index is higher. Day after day companies have issued profits warnings and talked of massive job cuts. Surely the future can only be better. Beware! This may be no more than the dead cat bounce: the rise in the price of a share that only presages further sharp falls.

There is much that could still go wrong. Driven by technology shares, markets had reached crazy levels, predicated on a belief that modern economies had changed fundamentally and that IT was the cause. Now, the belief is more a hope, and a forlorn one at that. The mood has changed to one of caution, graphically illustrated by the absence of buyers for Rolls Royce or Bentley cars.

Stock markets look to the future, though. The gloomier the present, the better are the prospects for a brighter future. The trouble is, the future may still be far off. Our faith in rescue by economic cycles should be tempered by the case of Japan. There, financial markets and the real economy have been in trouble for over a decade, with no sign of a solution.

One snare that has claimed the Japanese is deflation. We have been schooled in the principle that inflation is bad for us. So is deflation. When goods are falling in price, as they are in Japan, there is every incentive to postpone purchases. Consumer demand inevitably remains stagnant.

The Japanese have an unappealing range of options for their savings. Stock markets have performed badly and interest rates for depositors are zero. Closing off the easy routes to asset appreciation makes people gloomy and pushes them into saving more. Again, consumers shift their incomes away from spending towards savings.

Japan is the world's second largest economy, yet it has fallen into traps from which no easy exit is available. The problems are structural, not cyclical. There is no automatic mechanism that will provide a solution. Things have been getting worse in the last six months, as a million people have lost their jobs. How confident can we be that the world economy could not become mired in similar difficulties?

In fact, much recent talk tells us that globalisation is a characteristic of the contemporary world. With Japan, the US and Europe all showing signs of economic distress, what grounds can there be for optimism? With military action rocking already unstable parts of the world, who can put faith in forecasts?

Perhaps IT will be our salvation. It is a sector that is growing faster than the economy as a whole, and it is claimed to be yielding dramatic productivity gains. Yet at this particular time, IT is looking a spent force. The world's telephone companies are now reckoned to have collectively destroyed $350bn over the last five years, almost half the new money invested in the sector.

And growth in IT cannot continue forever. The sector is already approaching nine per cent of the whole US economy. In developed economies, it has been growing around four per cent faster than output as a whole for several decades. If that were to continue indefinitely, then the IT sector would become the whole economy within about fifty years.

Clearly this cannot happen. Growth must be choked off long before that point. Other major sectors of the economy will continue to exist. Even that dynamo for change, the internet, is looking jaded at present. Prices from online retailers are catching up with the high street, consumer internet connection charges are likely to rise and the remaining dot-coms look fragile.

A lot depends on whether the productivity gains claimed by the IT revolution are real or not. Perhaps you know. Has your productivity been boosted by IT?

** Martin Brampton is a director and founder of Black Sheep Research (http://www.black-sheep-research.co.uk ), an independent consultancy providing research, writing and speaking services on a wide range of business and technology subjects. Martin was previously a director at Bloor Research, and has worked with IT as a user and analyst for over 20 years. He is a frequent contributor to silicon.com's weekly Behind the Headlines TV programme and can be contacted at silicon@black-sheep-research.co.uk.