Written by Gavin Kakol, GEI Associate
A recent report from McKinsey Quarterly finds that business executives are more concerned about the global economy then they were in March. As the European Union continues to show signs of instability (EU summit leaders pictured), many business leaders fear another recession is coming. Overall, the most cited risk to global economic growth is sovereign debt, following close in second is low consumer demand. Fears of over inflation and decreased manufacturing in India can’t be overlooked either.
A total of 1,349 executives from a variety of businesses worldwide took part in a McKinsey report survey between June 11 and 15 of 2012. Their results were adjusted to their businesses overall input of the individual national GDP numbers. Some of the pessimism of the report may have been in anticipation of the upcoming Greek election; only 24 percent of the executives expected that Greece would not default after a regional compromise. A larger 38 percent expected Greece to default but remain with the EU, while 21 percent expected a complete exit.
Antonis Samaras was sworn in as Greece’s prime minister on June 20, 2012. With the collapse of the eurozone averted (temporarily?), the situation has recently shifted to fears over another bail out, this time for Spain and Italy.
On the 30th of June, 2o12 a Euro summit was held between 27 eurozone administers to approve the bailout of Cyprus and the necessary conditions to aid Spain’s banks. Earlier in June, Spain asked for assistance to bail out its bank as its 10 year bond price had risen to nearly 7 percent. Similar high rates precipitated bailouts for Ireland, Greece, and Portugal.
Italy has also been worrying investors as its debt continues to increase (122.7 percent of GDP) while its unemployment remains high at 10.1%. Sebastion Paris Horvitz, chief market strategist for HSBC Private Bank in Paris acknowledged that:
The issue today is that, indeed the problem has become much bigger. We are not talking about tiny Greece but big Spain and even bigger Italy.
The June 30 summit meeting resulted in a coalition between Italian prime minister Mario Monti, French President Francois Hollande, and Spanish Premier Mariano Rajoy against German Chancellor Angela Merkel. The result was necessary concessions to aid Spanish banks and alleviate the European debt crisis. The resulting compromise kept Spain and Italy eligible for aid, allowed for the European Stability Mechanism (ESM) to input money directly into Spanish banks with the future creation of a banking adviser, and kept taxpayers from claiming preferred creditor status. That day, bond prices fell from 6.94 (June 29) to the current 6.26 (July 3) for the Spanish 10 year note; the EU again managed to evade a financial meltdown.
Going back to the McKinsey report, 10 percent of executives claimed that that the worldwide economy is better than it was 6 months ago. Just 20 percent expect any improvement in the next six months. In the past year the number of executives believing the economy has moderately improved dropped from 50 to 19 percent, shifting to a moderately worse view of 15 to 42 percent.
Domestically, optimism about economic conditions varies by regions. North Americans are the most optimistic, with 36 percent believing the economy will get better over the next six months, while just 23 percent say it will get worse. The eurozone is exceedingly pessimistic with just 18 percent of participants predicting improvement compared to 45 percent expecting it will worsen. Just 3 percent of Indians believe their economy is better than six months ago. A majority (54 percent) of Indians believe that inflation is one of the greatest risks next year; similarly, 59 percent expect an increase in inflation.
In addition to questions about India, concern was also expressed about slower growth for Brazil. Curiously, China was not mentioned in the survey results.
Despite worries about the global economy, executives are optimistic about their companies’ prospects over the next six months. Only 15 percent of executives believe their customer demand will fall, and over 55 percent expect profits to increase.
With abundances of sovereign debt and decreases in consumption due to austerity measures, the eurozone is a key component to the outlook of the global economy in the upcoming months. The European Central Bank (ECB) will be conducting a meeting July 5th, where they are expected to lower the benchmark interest rate by 0.25 percent to 0.75 percent in an attempt to ease credit.
- Economic Conditions Snapshot, June 2012: McKinsey Global Survey results (Mckinsey Quarterly, June 2012)
- German Bonds Crop as Safety Bid Fades, Ireland Returns to Market (Lukanyo Mnyanda and Anchlalee Worrachate, Bloomberg, 03 July 2012)
- Other sources linked in article.