McKinsey: Execs more upbeat about world economy

25 January 2016 5 min. read
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Executives are more upbeat about the world economy in the coming six months than they were three months ago, a survey from McKinsey & Company finds. Geopolitical risks impacting the recovery remain however, with now more executives concerned about the effects of instability on the world economy. In terms of their domestic markets, US executives are concerned about the effects of the upcoming election, while Chinese executives worry about low consumer spending.

In McKinsey & Company’s most recent survey of international executive sentiment about the world economy and its direction, geopolitics and various destabilising factors ring large. For its report, titled ‘Economic Conditions Snapshot - December 2015’, the consulting firm asked 2,000+ executives representing the full range of regions, industries, company sizes, functional specialties, and tenures about their opinions regarding the direction of both domestic as well as international economic trends.

Changing trends

The economic consequences of geopolitical events affecting the world economy – such as the war in Syria, Russian influence in Ukraine and the threat of terrorism throughout the world – were felt the most strongly in December 2015. 81% of respondents to the survey say that geopolitical instability is a risk, up from 54% in Q3, and up slightly on the start of the year when it stood at 76%. Concern about low consumer demand has fallen slightly, from 34% in Q3 2015 to 30% of respondents in Q4. It remains up on the start of the year however, when it stood at 22% of respondents.

New asset bubbles are of least concern according to the survey, at 19% in Q4, down slightly from 21% in Q1. Domestic political conflicts increased slightly in concern, with 23% of respondents highlighting it as an issue for global growth, up from 16% at the start of the year.

International executive expectations

While international growth risks relate the most to geopolitical uncertainty, potential risks to domestic economic growth in the next 12-months present a different picture across different markets. The Asia-Pacific and Chinese markets in particular are concerned about the effects of low consumer demand, at 50% and 48% respectively. The executives functioning in these markets are the least concerned about domestic political conflicts at 14% each.

European executives are the most concerned about geopolitical instability at 44%, followed by low consumer demand at 40%. The least concern in this region is the transition of political leadership. North America, where the US 2016 elections loom around the corner, sees executives concerned about the transition of political leadership at 44%, followed by domestic political conflicts, with the US congress at deadlock, at 39%. Indian executives are the most concerned about domestic political conflicts at 50%, followed by insufficient government policy support at 43%.

Long term economic shock potential

The survey also asked respondents to rank major potential long term (10 year) risks to global economic growth. According to the survey, the biggest risk is geopolitical instability in the Middle East and North Africa. Almost half (46%) see it is an extremely likely risk in the coming ten years, while 40% say it is very likely to shock the global economy; this is up from the combined 27% and 44% respectively a year previous.

The risk of a major terrorist attack shocking the global economy in the coming ten years is up considerably. Now 37% say it is extremely likely and 44% say it is very likely, up from 16% and 33% respectively a year previous. The least concerning event ranked is a major environmental disaster; 15% say it is extremely likely and 34% saying it is very likely; although it is again up from a year previous.

Bullish world economic predictions

Although respondents are more concerned than a year ago about risks, they are also relatively more bullish about the prospects of the world economy in the coming six months. In Europe 40% expect conditions to improve, compared to 20% that believe it will diminish. Improvements to economic prospects are the most keenly expected in India (51%), with just 15% expecting a worse picture in the coming six months.

Latin America executives have significantly changed their expectations for the coming six months. In September 2015, 24% expected the coming six months to see better conditions, which has now jumped to 40%. The most concerning conditions remain in China, where 27% of those surveyed think conditions will be better in six months, and 32% think it will be worse.

Developed markets more upbeat

When comparing emerging and developed markets, the research highlights that considerable disparity exists. Emerging market respondents are considerably more concerned about their country’s economic future. In May 2015, 24% of respondents said things would get better over a six-month period, while 53% said it would get worse, this has dropped to 20% that believe it will get better in the six months and 57% that believe it will get worse.

Developed market leaders, regarding prospects for their country’s growth, cite generally favourable conditions. In May 2015, 54% said the outlook in the coming six months would improve, while 20% said it would get worse; in December this dropped to 40% that said it will improve in the coming six months, however, only 20% said it will get worse.