More than three-quarters of global corporate executives say they believe geopolitical disputes are growing, constitute the biggest threat facing the worldwide economy and have the potential for derailing enterprise plans across multiple markets over the next six months. The geopolitical issues, including religious conflicts, political disputes and fiscal problems, are seen intensifying in all economic regions, leading to systemic shocks that will eventually crimp global economic growth, according to executives responding to a survey by consultant McKinsey & Co.
The results of the McKinsey survey are not exactly surprising. Executives predict the likelihood of growing debt defaults, volatile exchange rates, economic volatility and the possibility that at least one country will exit the Eurozone soon. Some of these findings are already borne out by current developments in Europe; Greece is on the verge of exiting the Eurozone economy – based on comments by European leaders who say a “No” vote following a referendum planned for later this week by the Mediterranean country on its discussions with its creditors could result in Greece being compelled by other member nations to leave the European Union. (See: Spain’s Rajoy tells Greece No vote means no euro and Greece will have to leave euro if it votes no in referendum, insists David Cameron.)
McKinsey conducted its survey at the beginning of June, polling nearly 1,500 global executives at the height of European discussions with Greece about its debt obligations but well ahead of the political leadership’s announcement that a referendum would be conducted on the terms of proposals before the EU. Even so, the polled executives acknowledged growing fears about the direction of the global economy as a result of rising geopolitical turmoil and fiscal problems in emerging economies. While problems in Europe remain a persistent worry, about one-third of the respondents also expressed concerns that “geopolitical instability in Asia is very or extremely likely to shock the world economy in the next year,” according to McKinsey.
“Back in December 2014, half of respondents in emerging markets believed conditions in their home economies would have improved by mid-2015,” the McKinsey report stated. “But today they report more negative than positive views: 48 percent say economic conditions at home have worsened in the past six months, while only 26 percent believe they have improved. So far, in 2015, they have also been more downbeat overall than their developed-market peers.”
Future expectations for the economy aren’t that much better in the developed economies, too. In North America only about one-quarter of responding executives say they see the economy improving at a “substantially better” or “moderately better” rate in the next six months. Nearly half of the respondents expect conditions to remain the same while 28 percent see the situation becoming “substantially worse”.
Paradoxically, considering the growing concerns that Greece might exit the Eurozone, executives in Europe are the most optimistic about the next six months; half of them expect improvements in economic conditions, 41 percent see conditions remaining unchanged while only 9 percent predict the situation would become substantially worse. Indians, too, are generally optimistic about the future although they are warily watching events unfolding in other parts of the world. This contrasts sharply with expectations from executives managing enterprises in Latin America, many of who see the economic conditions in the region getting worse, according to McKinsey.
“The optimism from India has also tempered, though executives there are still much more upbeat than those everywhere else. Meanwhile, more than half of respondents in Latin America believe domestic conditions will worsen over the next six months,” the consulting firm said. “Sixty-six percent of executives in Latin America believe unemployment will rise in the next six months, compared with 23 percent globally.”
Most of the risks identified by the respondents to the McKinsey survey are similar to the ones that have in the past troubled the electronics industry, which has become more global in its operations and therefore more vulnerable to events in the different regions. Respondents said the top potential risks to economic growth over the next 12 months in order of importance are: geopolitical instability; increased economic volatility; increased volatility of exchange rates and; one or more sovereign-debt defaults.
While electronics manufacturers have generally managed in the past to skirt geopolitical instabilities at key manufacturing centers, those that generate a larger percentage of sales outside their headquarters have greater exposure to currency volatility as many European technology companies have found out since the beginning of this year as the euro fell against the U.S. dollar. The largest semiconductor companies based in Europe, for example, said first quarter sales would have been several percentage points higher had the euro-dollar exchange rate remained stable.