Three months after reporting the gloomiest outlook on the global economy in more than a year, executives in our latest survey indicate that their sentiments have improved. While respondents’ expectations have not recovered fully from the pessimistic views expressed in June, larger shares of them say they anticipate conditions in their countries and in the global economy to improve in the next six months.
The recent ups and downs of executives’ expectations reflect the uncertainty that persists four years after Lehman Brothers filed for bankruptcy. Companies are still sorting through the aftermath and coping with uncertain conditions, but the short-term outlook now is far more positive. This optimism even extends to the eurozone, where the share of global respondents expecting at least minimal growth in six months has doubled since June. Only 4 percent say it’s extremely likely that any countries will leave the monetary union in the next year. Still, as we have seen all year and in keeping with the latest findings from the European Commission’s economic sentiment indicator, eurozone executives have a more negative than positive outlook on conditions in their own economies.
Respondents also indicate concern about low consumer demand which, for the fifth survey in a row, is cited most often as a risk to domestic growth. When asked about shocks to the global economy in the next year, 61 percent of executives say geopolitical risks in the Middle East and North Africa are extremely or very likely. At the company level, expectations are more positive than negative: pluralities of executives say demand and workforce size will hold steady, and a majority still expect profits to increase.
Renewing optimism and emerging risks
Compared with the views expressed in June, larger shares of executives say current conditions in their home countries are better than they were six months ago. This is particularly true in India, where 31 percent say conditions are better now and only 3 percent of executives there said the same in June. The change in sentiment may reflect recent policy changes announced by the Indian government aimed at bolstering the economy. However, in developed Asia and developing markets, more executives now say conditions in their countries are worse than six months ago.
Looking ahead, executives are more bullish on unemployment: 33 percent say it will decrease in their countries in the next six months—the largest share to say so since June 2011. At the same time, inflation rates are an emerging issue, with just over half of executives expecting them to increase; three months ago, only 38 percent of executives said the same. Still, more respondents in every region agree conditions will improve at home in the coming months (Exhibit 1).
Globally, more executives also say economic conditions are better now than they were six months ago and that conditions will improve in six months’ time. The relative optimism varies across regions, however, and the results reveal ongoing uncertainty in 2012 (Exhibit 2). Another indication of uncertainty are the equal shares (23 percent) in this survey that say either renewed global growth and economic development or global struggles with structural challenges and economic shocks are most likely to occur over the next decade.
Respondents cite several new risks to growth that could inhibit improved conditions—namely, transitions of political leadership (domestically) and geopolitical instability (globally), which have replaced sovereign debt as a high-ranking concern. Only 39 percent say sovereign debt is among the biggest potential risks to global growth, compared with 59 percent who said so in June. Accordingly, expectations for the eurozone have bounced back since June, when only 11 percent of executives said they would expect to see growth in the eurozone; now 23 percent expect growth. And while eurozone executives in past surveys have held distinctively optimistic views (relative to their peers) about the region’s future, their expectations are now more aligned with those in the rest of the world.
Expecting economic shocks
Amid this fragile optimism, clear majorities of executives say a variety of potential economic shocks are at least somewhat likely to happen in the next year (Exhibit 3). Given the shifting risks to global growth and the timing of the survey, it’s perhaps not surprising that the largest share of executives say the likeliest short-term economic shock is geopolitical risks in the Middle East and North Africa.
The results continue to suggest a link between expected eurozone outcomes and expectations for the global economy as a whole (Exhibit 4). But just 4 percent of executives say the exit of at least one country from the eurozone is extremely likely, and 16 percent say it’s very likely.
In the long run, most executives—95 percent—say volatile oil prices are likely in the next decade, followed by spikes in food prices and rising market volatility (Exhibit 5). Further, more than half of all respondents say four of the eight shocks the survey asked about are either very or extremely likely to happen.
The demand dilemma
While there are differences across geographies, executives continue to identify low consumer demand as the top risk to economic growth. Low demand continues to be cited most often as a risk to domestic growth in the next year; in this survey, respondents also select it most often as a risk to global growth (Exhibit 6).
The 48 percent who cite low demand as a threat to country-level growth represent the largest share to identify this risk since February 2010, and low demand is of particular concern in developed economies. Compared with June, a larger share (29 percent, up from 25 percent) also cite low demand as a risk over the next decade.
A slightly smaller share of executives now expect demand for their companies’ products and services to increase than did in June, but the largest share in both surveys expect demand to stay the same. Consistent with earlier surveys, executives are most likely to say the size of their workforces or departments also will hold steady. And a majority of respondents still expect their companies’ profits to increase over the next six months, which we also saw in June.