Executives see geopolitics and Chinese slowdown as main risks

A new report into global executive sentiment finds that sentiment about the global economy remains gloomy, particularly in the Asia-Pacific region. While Chinese executives are positive that the country can meet its five year annual growth plan of 6.5%, global executives are more cautious. The slowdown in the Chinese economy is, according to executives, the biggest risk to global economic growth, followed by geopolitical instability. Changes in consumer expectations, talent scarcity and the rollout of new technologies are also factors affecting projected growth in a range of sectors. 

To explore global sentiment, McKinsey & Company releases a quarterly economic conditions snapshot. The latest is titled ‘Economic Conditions Snapshot, 2016’, and explores changes in global economic sentiment, the growth prospects of the Chinese economy, global risks as well as risks affecting specific industries. The survey involved 2,772 respondents representing the full range of regions, industries, company sizes, functional specialties, and tenures.

Global economic outlook
The global economy had a bumpy start to the year. The Chinese stock market fell considerably causing jitters across global exchanges, while the country’s economic growth is expected to remain below 7%. Hikes to the US base interest rates have created further jitters for many investors. Brazil has slid into recession and political turmoil, while Russia, and other oil dependent countries, are bearing the brunt of poor diversification and a sustained low oil price.

The survey highlights that developed and emerging market respondents continue to hold a negative, rather than a positive, view on the world economy. 51% of the emerging market respondents, for March 2016, said that global economic conditions are worse compared to six months ago, up from 49% in December last year. For developing market respondents, the increase was considerably starker, up from 30% in December last year to 47% in March of this year. Both groups are still considerably more positive about economic conditions than in September last year, when 56% of developed market respondents and 76% of developed market respondents said global conditions were worse than half a year earlier.

Domestic economic outlook
In terms of the concern about home economies, the results show that Asia-Pacific respondents are gloomier about current conditions than three months earlier. In December last year, 31% of Asia-Pacific respondents said things were worse than six months earlier, while 35% said things were better. In March, 46% of respondents said things were worse than six months earlier and 19% said things were better.

Europe too has seen a fall in sentiment about current economic conditions compared to the previous period. In December, 22% said conditions were worse than six months earlier, while in March this had risen to 33%. In December 46% said that their domestic economy was performing better than six months earlier, which, by March, has fallen to 32%. The North American respondents are only slightly less optimistic about the current domestic picture compared to six month earlier, in relation to that of December.

Global economic risks
The survey also considers the biggest threats currently affecting the near-term of global economic growth. The list is topped by a slowdown in China’s economy, cited by 47% of respondents, followed by global instability, at 46% of respondents. A slowdown in global trade was cited by 27% of respondents as a risk, while increased economic volatility came in at 23% of respondents. The political circus, particularly in the US, was cited by 19% of respondents, while asset bubbles came in at number seven. The lowest areas of risk include inflation, cited by 3%, increased capital costs, cited by 4%, and extreme weather events, cited by 5%.

The China question
This quarter's report specifically explores what has become a global hot topic: the growth of the Chinese economy. In the latest survey, those in China remain mostly downbeat: 57% say economic conditions at home have worsened in the past six months, while only 12% say conditions are better. Unemployment has recently emerged as a concern. Just over half of respondents in China believe the Chinese unemployment rate will increase in the next six months, up from 35% in December.

Respondents were also asked whether they believed China would meet its current five year plan’s “medium high” GDP growth target of 6.5 % annually. The results show a disparity between domestic respondents, looking from within, and those looking at China from without. The majority are those looking from without are in the unlikely camp, with 44% that believe it is somewhat unlikely and 11% that it is very unlikely. Those from the outside camp that believe it is very likely tally 6% and those that believe it is somewhat likely tally 28%. For respondents within the Chinese market, 36% say that is somewhat likely, and 22% say that it is very likely that the plan’s ambition will be met.

Industrial risks
The research also considers the risks affecting the growth in different industries over the next 12 months. Top of the list for the retail sector is low consumer demand, cited by 67% of sector respondents, followed by changing consumer needs/or expectations at 64%. The high tech/telecom industry cites risks in the scarcity of talent, cited by 47%, followed by fast pace of technological changes in the industry at 41%.

Professional services too are not finding the talent they need, easily, while their customer needs and/or expectations too are changing, as cited by 38% of respondents. Financial services are facing changes in customer expectations as well as the rapid development of technology, both cited by 36% of respondents.