McKinsey: Increased volatility is wreaking havoc on business sentiment

Business executives are more downbeat about the state of the global economy now than at any time this year, particularly in emerging nations, with turmoil in financial markets fueling concerns over the economic outlook both at home and abroad.

That’s the downbeat assessment to come from McKinsey’s September quarter economic conditions survey with the group noting that volatile economic conditions, exchange rate fluctuations and geographic instability are seen by executives as the most likely threats to the outlook for economic growth in the months ahead.

Given they sit at the epicentre of financial market concerns, executives in emerging markets expressed particular concern over increased volatility dampening levels of economic activity. Some 59% of respondents from these nations indicated that economic conditions had deteriorated over the past six months, far higher than the 22% levels recorded in North America and Europe.

Highlighting increased economic risks in China and Latin America, 80% and 91% of respondents respectively suggested that economic conditions had deteriorated compared to six months earlier.

The perception towards domestic economic conditions by region can be found in the right hand column below. Based on survey responses on the outlook for the economic conditions from six months ago, the deterioration has been more severe than many executives initially envisaged.

Not only were executives more downbeat on domestic economic conditions, they were also more gloomy on the outlook for the global economy.

“In the past four surveys, executives consistently reported modest views of the global economy; they were most likely to say that current conditions had held steady. But now, respondents in all regions are most likely to say that the global economy is worse than it was six months ago,” note McKinsey.

“Emerging market executives are much gloomier than their peers elsewhere: 76% say the world economy has worsened in the past six months, compared with 56% of executives in developed markets.”

The results from the McKinsey survey, while predictable, point to the likelihood for subdued business capital expenditure ahead. Firms are far less likely to invest when the outlook for the economy – both at home and abroad – is opaque.

It’s all part of a vicious economic cycle that the world currently finds itself in. Monetary policy is losing its potency while fiscal policy is hamstrung, all at a time when global growth is weak – hardly the ingredients to encourage renewed business investment.

Unless global growth regains its footing and accelerates – something that has been predicted continuously over recent years only to be proven incorrect – it’s unlikely that the funk the world economy currently finds itself will be resolved.

Sentiment towards the outlook for China’s economy, as the McKinsey survey suggests, most likely holds the key to breaking this negative feedback loop.

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