Tuesday, February 24, 2009

McKinsey survey shows some silver linings

The McKinsey Quarterly released the results of its Economic Conditions survey, conducted January 27, 2009 - February 2, 2009. The survey is broad-based, where 1,820 executives were surveyed from around the world and across a large set of industries. The first notable finding of the survey is the following silver lining: 40% of executives believe that the economy will initiate recovery by the end of 2009.

From the McKinsey Quarterly (this is a free service, but you must register to read the article):
Three-quarters of all respondents, and more than 90 percent of those in the eurozone, expect their nations’ GDP to fall in 2009. This is an increase from November, when 59
percent of all respondents expected GDP to fall. Given that opinion, it’s not surprising that executives indicate that their nations’ economies are bad and that they have low expectations for the near term. Notably, however, those views have remained fairly stable between December and January, after falling markedly between November and December (Exhibit 1). This may indicate a belief that the economy has hit bottom and that even tens of thousands of layoffs and continued steep losses in shareholder value aren’t worsening the situation. Some 40 percent of respondents expect an upturn to begin by the end of this year.
At some point, the economy will stabilize. But that is unlikely to occur in the first quarter of 2009 (according to the chart above).

The survey also finds that 43% of executives believe that government actions made their domestic economic situation better than had the government not intervened. And furthermore, that over a quarter of the executives surveyed (27%) believe that government actions had no net effect on the economy (chart below).

I wonder if the term government actions includes government announcements. At least in the U.S., big government announcements that were not acted upon - buying Treasuries or forcing mortgage rates to 4.5% - shifted market expectations; and in my opinion, created more confusion and uncertainty.

And finally, a little blip at the end of the survey indicates that in response to the global recession:
More executives expect their companies to shrink than grow in 2009 in terms of profits and workforce size; however, most have not changed prices and don’t expect to.
A closer look at these results shows that 60% of respondents will not change prices, 20% expect to lower prices, and 11% would increase prices in the first quarter of 2009. I wonder in which country executives are planning to raise prices by March!

To date, most of the price declines (October 2008 - December 2008) in the U.S. have been energy-related. The survey response on pricing suggests that in the near term, executives would rather cut costs than change prices. Firms may see a more stable demand curve in expectation than the deflation story suggests, and that economic stabilization on the horizon.

There is probably still some contracting to go. Wachovia makes their monthly forecast publicly on the web; and they expect the U.S. economy to decline an annualized 6.7% in the Q1 2009 (first quarter), 1.9% in Q2 2009, and -0.4% in Q3 2009. This is roughly consistent with the global executive responses from the McKinsey survey of stabilization in 2009.

Rebecca Wilder


  1. Thanks Rebecca for this excellent analysis of the McKinsey survey.

    Indeed the silver linings are quite in line with most economic forecasters who predict a return to growth by summer and solid growth in 2010.

    Indeed now some of the mainstream media is picking up on the growth in the later part of 2009.


  2. http://www.federalreserve.gov/monetarypolicy/bst.htm

    great new board of governors web page on credit & liquidity programs and balance sheet