- December 1, 2018: Vol. 5, Number 11

Attitude matters: Global economic sentiment is declining

by Jennifer Molloy

Wondering how business executives around the world are feeling about current economic conditions? In a nutshell, sentiment on the economy is declining, particularly in emerging markets, and more businesses are looking to the United States for opportunities, according to a McKinsey & Co.’s Economic Conditions Snapshot, September 2018, a McKinsey global survey.

For the third consecutive quarter, the survey’s respondents, who represent the “full range of regions, industries, company sizes, functional specialties and tenures,” are less optimistic on the economy and more cautious for the coming months. A full 35 percent of participants indicated moderately worse or substantially worse sentiment regarding current economic conditions in their home countries, up from 15 percent six months ago. And while 36 percent of these respondents believe current conditions are moderately or substantially better, this is down from 59 percent in the March 2018 survey.

“Expectations for trade activity are declining, trade-related risks are still perceived as top threats to growth, and for the first time this year, less than half expect the rate of economic growth, both at home and globally, will increase over the next six months.”

This sentiment is more dire for respondents in emerging markets, who have a more negative overall assessment of the global economy, economic conditions in their own countries, and their companies’ prospects. In some instances, these executives view U.S. opportunities as better for their businesses than those in their own or nearby economies.

For all respondents, worsening sentiment about their own and neighboring countries’ economic prospects is in contrast to the survey conducted six month ago, with current results suggesting the best business opportunities may be shifting from emerging economies (such as China and Brazil) toward developed economies, such as the United States. In developed Asia, respondents now cite the United States most often for their best business prospects. In the past two surveys, participants in developed Asia chose China and Japan most often. This is also the case in India, where respondents from the country now view the opportunities for their businesses as being better in the United States than in India, which was cited most often in McKinsey’s past two surveys. In Latin America, participants are now less likely to cite Brazil for the best business prospects than they did six months ago, but in both Latin America and in North America, Mexico is now viewed as a more attractive business destination.

Looking ahead six months, fewer respondents than in the past two surveys believe economic conditions will improve globally and in their home countries. For the global economy, 41 percent of participants in the September 2018 survey foresee moderately worse or substantially worse economic conditions, up from 15 percent in December 2017. Only 25 percent of respondents believe the next six months will be moderately or substantially better for the global economy. This figure stood at 51 percent in December 2017.

And for respondents’ home economies, 34 percent expect moderately or substantially worse economic conditions in the next six months, up from 20 percent in the December 2017 survey. And while 32 percent of these respondents think economic conditions will be moderately or substantially better in the next six months, this is down from 49 percent in the December 2017 survey.

Despite these figures, however, McKinsey says participants across regions are more positive regarding their future than at present, with the exception of those based in Europe and North America, particularly in the United States.

“In North America, respondents report much more buoyant views than their peers on current conditions: 53 percent say their economies are in better shape now than six months ago, compared with 30 percent of all other respondents,” notes the survey. “But they are much more negative about their home countries’ prospects. Just 28 percent in the region believe future conditions will continue to improve, and a slightly larger share predict that domestic conditions will worsen.”

And while 44 percent of respondents believe the global economic growth rate will increase in the next six months (39 percent expect a contraction), this is down from 65 percent in March 2018. For their home economies, 47 percent feel the same, down from 61 percent six months ago. This is also a marked decline in expectations for their home countries’ trade prospects, with 46 percent expecting trade levels to decrease in the next year, twice the amount that anticipated trade to decrease in December 2017.

According to McKinsey, trade issues are still the top perceived threats to economic growth.

“As in our previous survey, trade-policy changes and changing levels of trade are cited first and third on the list of potential global risks, and trade-policy changes continue to top the list of threats to domestic growth,” states the report. “At the same time, a few other risks have come to the fore. The shares of respondents citing exchange-rate volatility as a global and a domestic risk have increased since June, with emerging-market respondents expressing greater concern.”

Looking ahead, respondents in emerging economies are also less optimistic than their counterparts in developed economies regarding workforce size, demand for company products and/or services, and company profits in the next six months.

What does all of this mean for real estate investors? Trends in economic sentiment are among the many considerations property investors must weigh carefully in their investment decision making.


Jennifer Molloy is senior editor of Institutional Real Estate Asia Pacific.

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