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Economic Conditions Snapshot, March 2013 McKinsey Global Survey results

Executives report better conditions at home and in the global economy, but they also expect political and governmental issues to pose risks to growth.

Growing shares of executives say their countries’ economies have improved, but domestic political conflicts weigh heavily as potential threats to growth, according to our latest survey on economic conditions.1 This is especially true in the United States, where negotiations failed to avert the automatic government-spending cuts that went into effect the week before the survey was conducted.

Low consumer demand remains the most frequently cited risk to domestic and global growth over the next year, according to executives. For the first time, though, we asked about political conflicts as a potential threat to growth—and this issue is not far behind. Political conflicts are now the second most cited risk to domestic growth (38 percent of all respondents say so), followed by insufficient support from government policy (cited by 37 percent of respondents).

Compared with the previous two surveys, respondents across regions (including the eurozone) express notably more positive views on current conditions in their own countries and the global economy, while their outlook for the next six months is still more optimistic than not. Looking at the next decade, executives also cite political conflicts most often as a risk to their countries’ growth, though responses vary by region.

Economic Conditions Snapshot, March 2013

McKinsey Global Survey results

The online survey was in the field from March 4 to March 8, 2013, and generated responses from 1,367 executives representing the full range of regions, indus-

tries, company sizes, tenures, and functional specialties. This was the week before automatic cuts to government spending went into the effect in the United States, and the week after

an inconclusive general election in Italy. To adjust for differences in response rates, the data

are weighted by the contribution of each respondent’s nation to global GDP.

Jean-Fran?ois Martin

% of respondents, by of?ce location

Current and expected economic conditions in respondents’ countries 1 Includes China and Latin America.Mar 2013 Dec 2012 Sept 2012 June 2012

Asia-Paci?c

Eurozone North

America

India

Developing

markets1

Conditions are better than 6 months ago Conditions will be better in 6 months

Total

36 Exhibit 1

Country-level conditions improve

Perceived improvements—and political concerns—at home

The shares of executives reporting that current economic conditions in their countries are better

now than six months ago have risen since December, while their largely positive outlook

on future conditions held steady (Exhibit 1). Those in developed Asia2 are particularly positive:

the share of respondents there who report improved conditions has nearly tripled since

the previous survey. And though the views of executives in the eurozone are still the gloomiest

across regions, roughly one-quarter say conditions at home are better, up from 15 percent

three months ago. Respondents in India maintain the most positive outlook on future conditions,

while those in the eurozone remain the most cautious—or at least uncertain. Executives in

the eurozone are almost equally split in expecting conditions will be better, the same, or worse

in six months.3

2 Australia, Hong Kong,

Japan, New Zealand,

the Philippines, Singapore,

South Korea, and Taiwan.

3 In the most recent survey, 34

percent of executives in

the eurozone say economic

conditions in their coun-

tries will be better in the next

six months, 32 percent say

conditions will stay the same,

and 32 percent say they

will worsen.

Improving conditions aside, respondents often point to political and governmental forces as risks to growth in their home economies. After sluggish demand, political conflicts are cited

most often as a threat to domestic growth over the next year—and most often overall by those in North America (Exhibit 2). Executives also express growing concern about a lack of government policies that support economic and business activity.4 These responses vary across regions, with executives in North America and India most likely to cite political conflicts and insufficient policy support. Forty percent in India also cite transitions of political leader- ship as a risk, compared with 18 percent of the global average.

Among perceived risks to global growth, political conflicts rank fourth overall, but

respondents in North America are more likely than their peers in other regions to cite it. This is not surprising, given that a majority of all executives (58 percent) say pending cuts to

% of respondents, by of?ce location

Top risks to domestic economic growth, next 12 months 1 Includes China and Latin America.

Asia-Paci?c, n = 145

Total,n = 1,367

Eurozone, n = 247

North America, n = 402

India, n = 131

Developing markets,1 n = 232

Low consumer demand

424528

6114

In?ation 373035365340

Insuf?cient

government-policy support 272119451320

Lack of access to credit

20173865713

Exhibit 2

Political tensions pose risks to growth

In this survey, 37 percent of all respondents cited “insufficient government-policy support” as a potential threat to growth, compared with 28 percent who said so in December 2012. Across regions, the biggest percentage-point jumps in the shares citing a lack of support are in India (53 percent, up from 36 percent in December),

developing markets (35 percent, up from 22 percent), and North America (40 percent, up from 28 percent).

% of respondents 1

1 Figures may not sum to 100%, because of rounding.

Current conditions in global economy compared with 6 months ago

Expected conditions in global economy, in 6 months

Dec 2012,

n = 1,575

June 2012,n = 1,349

Substantially better

Moderately better

The same

Moderately worse

Substantially worse

Exhibit 3

Optimism extends to global economy

government spending in the United States will have a negative impact on growth there in the next three years 5; a slightly larger share of those in the United States (63 percent) say so.

Continued optimism amid uncertainty

Compared with three months ago, respondents have a more positive view of current global conditions as well: 45 percent say conditions in the world economy have improved, up

from 30 percent who said so in December, and nearly half expect conditions will be better in six months (Exhibit 3). Across regions, respondents in developed Asia are now the most positive about current global conditions, although they were among the most negative throughout 2012. In December, 22 percent of respondents in the region said global conditions had improved; now 57 percent say the same.

On March 1, 2013, the Friday before the survey entered

the field, a set of automatic cuts to government spending in the United States (also known as “sequestration” or “the

sequester”) went into effect. In the weeks leading up to the sequester, US political leaders failed to negotiate a deficit-reduction agreement that would have supplanted the sched- uled cuts.

% of respondents,1 by of?ce location

Likelihood of potential shocks to global economy, next 12 months Eurozone respondents All others Eurozone respondents All others 1 Respondents who answered “not at all likely” or “don’t know” are not shown.

Exit of 1 or more countries from eurozone End of euro as single European currency

Dec 2012

Extremely likely

Very likely

Somewhat likely

Exhibit 4

Eurozone concerns continue to wane

The results also indicate that some global concerns about the eurozone have eased. Decreasing

shares of executives inside and outside the region say it’s at least somewhat likely that countries will exit the eurozone in the next year or that the euro will end as the single European currency (Exhibit 4). Respondents in the eurozone express less concern than others that either of these economic shocks will come to bear; they are also less likely than in the previous two surveys to expect an increase in their inflation rate.6

And while sovereign-debt defaults remain the second most-cited threat to global growth over the next year, after demand, just 31 percent cite that risk now—down from 41 percent in December

In the eurozone, 30 percent

of executives expect the inflation rate there will increase over the next six months, down from 46 percent who said so in December and 53 percent in September. By contrast,

half of all global respondents expect the inflation rates in their home economies to increase.

(Exhibit 5). As a threat to domestic growth, sovereign-debt defaults have reached a new low among all respondents and in the eurozone. In June 2012, about one-third of global executives (the second-largest share) and half of those in the eurozone cited sovereign-debt defaults as a risk to their countries’ growth; only 8 percent of all respondents and 13 percent in the eurozone say so now.

Still, responses from the region highlight some persistent uncertainties. High unemploy- ment, which the European Commission most recently pegged at 10.8 percent,7 remains a concern. Although the share of executives in the eurozone expecting an increase in their countries’ unemployment rates is slightly smaller than in December, more than half expect unemployment to rise—compared with roughly one-third of all respondents who say the same about jobless- ness in their own countries. Since last June, more respondents in the eurozone than in all other regions continue to express concern that low demand will threaten country-level growth over the next year.

The long-term outlook

On risks to domestic growth in the decade ahead, respondents look to political conflicts most often, followed by low levels of innovation, government regulation, and access to talent. In

developed Asia, demand is the most frequently cited risk, while the share of executives there citing the loss of business activity to lower-cost countries has plummeted to 33 percent

% of respondents

Sovereign-debt default(s) cited as risk to global and domestic economic growth, next 12 months Total

Eurozone

Mar 2013Dec 2012Sept 2012

June 2012

Growth in global economy

Growth in respondents’ countries

3535

4139

81112

2022

Exhibit 5

The threat of debt declines

See European Commission,

“Eurostat,” ec.europa.eu/eurostat.

% of respondents 1 who ranked scenario as most likely economic outcome over next 10 years

Dec 2012, n = 1,565

Mar 2013, n = 1,367

Global growth renewed

Developed economies spur innovations that restore growth; emerging economies rely more on

domestic demand; economic shocks, resource volatility are smaller-scale threats

Advanced economies rebound

Developed economies steadily resolve debt and labor issues that drag on productivity; emerging markets cannot sustain growth and face persistent crises

Emerging markets lead

Developed economies face debt and labor challenges; emerging markets sustain

growth through transition to domestic-led economies and are resilient through crises

Global lost decade

Developed and emerging markets do not resolve structural challenges, resulting in slowing

growth; the world experiences multiple economic and ?nancial shocks

1521

1218

3243

1219

New scenarios for 2013–23

1 Figures may not sum to 100%, because of rounding.

Exhibit 6

Emerging-market strength still expected

(down from 60 percent in December). The top perceived risk in North America is domestic political conflicts; in India, it is a lack of government-policy support; and in the eurozone,

it is low levels of innovation. In developing markets, equal shares cite political tensions and innovation most often.

When asked about potential shocks to the global economy, the largest share of executives

say instability in the Middle East and North Africa is extremely or very likely in the next ten years (63 percent), just ahead of volatile oil prices (61 percent). We asked about instability

in Asia for the first time, and the share of executives that say this economic shock is likely to occur over the next decade (30 percent) is much larger than the share expecting it in

the year ahead (12 percent).

In addition to the four scenarios for global economic outcomes that we asked about in 2012, we introduced two new scenarios in this survey. As was the case throughout last year, the largest share of executives still select one of the four earlier outcomes—emerging-market leadership and the transition of these markets to domestic-led economies, or “emerging markets lead”—as being most likely over the next decade (Exhibit 6). But the second-largest share rank the new “leveling decade” scenario first, in which emerging markets are resilient through future crises as China struggles to drive domestic demand, and Europe and the United States struggle with slow recovery and long-term debt. Executives in developed markets are likelier than

their counterparts in the emerging markets to select this new scenario.