Turbulent economic future ahead

Top executives at large companies around the world anticipate rough going for the foreseeable future and voice less optimism than they did this time last year, according to a new survey of 440 executives in seven major economies, published today by The Boston Consulting Group.

In its third survey of executives during the crisis—following surveys conducted in September and March 2009—BCG found that half of respondents expect an L-shaped recovery—that is, a slow and difficult one. This is a significantly higher percentage than in March 2009, when only 17 percent were so pessimistic. It also runs counter to the prevailing view, which is suggested by stock market movements and investor behavior indicating that “the crisis is behind us.”

The survey—published in In the Eye of the Storm: Ignore Short-Term Indicators, Focus on the Long Haul, the latest in BCG’s Collateral Damage series of reports on the global economic crisis—found that the corporate mood is even gloomier in some countries. In Spain, 64 percent expect an L-shaped recovery, in Italy, 57 percent expect such a recovery, while in France, the figure is 52 percent. The Japanese are the most pessimistic, with 72 percent expecting an L-shaped recovery.

“The somewhat fatalistic views of these global executives corroborate our perspective that one shouldn’t be overly influenced by short-term economic indicators. For the West, at least, once the stimulus effect wears off, we should expect an anemic recovery—the sort of slow-growth environment that will change the rules of the game for companies as they seek to grow amid increased competitive intensity,” said BCG senior partner David Rhodes, co-author of the new book Accelerating Out of the Great Recession: How to Win in a Slow-Growth Economy (McGraw-Hill, 2010).

“Most developed economies, particularly the United States, face a prolonged period of slower growth. The world view we’re hearing from executives is hardly one conducive to job creation, investment, and risk taking. Executives are, in fact, less enthusiastic about the economic outlook than many of their governments,” said co-author and BCG senior partner Daniel Stelter.

Profitability is expected to fall even further, M&A is expected to increase, and growth will be harder to achieve

Among the findings from the survey:

• Even after a rather dreadful 2009—when 64 percent of respondents in March expected profits to fall—61 percent now think profitability will continue to drop.

• Fully 60 percent of respondents expect increased consolidation in their industry, compared with only 42 percent last year.

• A large majority—69 percent—now believe growth will be harder to achieve moving forward; only 56 percent expressed that view in 2009.

Executives expect even less now from consumers than they did in 2009

Overall, respondents believe consumer attitudes have undergone a sea change:

• The vast majority of executives—79 percent—now expect an increase in the savings rate in their country, which will translate into less spending. Only 54 percent anticipated increased saving last year.

• Even more—89 percent—now anticipate increased consumer price sensitivity, up from 71 percent in March 2009.

More protectionism and a shifting global order

“With the passing of a year, managers have become far more resigned to the likelihood of significant changes to the global economic order. They believe governments in developed countries will continue interventionist policies—imposing more regulation and much more actively pursuing changes in industrial policy. Nearly three-quarters see more negative attitudes toward Western capitalism taking hold in their markets,” Rhodes said.

• Among surveyed executives, 78 percent anticipate more trade protectionism, up from 57 percent last year.

• In the latest survey, 73 percent of respondents expect a rebalancing of global trade, compared with only 56 percent last year.

• A large majority—82 percent—believe there will be more regulation, up from 58 percent last year.

“The emergence of protectionist measures is reinforced by the quandary in which many governments find themselves: having provided massive stimulus, many are now heavily indebted—and lack financial firepower for additional measures. Protectionism, however, does not require any spending,” said Stelter.

Accordingly, 85 percent of managers believe that their companies are likely to increase lobbying activities in the next two or three years.

Constraints on management are expected as well

As government involvement increases, executives see things changing for management teams:

• Most surveyed executives—60 percent—believe executive compensation will be lower over the next five years. They also expect that it will be more closely linked to long-term shareholder-value creation and that a lower proportion of any bonuses will be paid in cash.

• Among respondents, 77 percent believe risk management will become more important than it is currently.

• And 70 percent of surveyed executives believe that nonexecutives will play a more important role in setting and challenging company strategy; will be more active in holding management accountable, and will themselves need to have a greater technical understanding of the business.

Companies are opting out of activities that lay groundwork for growth

“With executives preparing for a more prolonged, anemic recovery—characterized by greater trade problems, increased consumer price sensitivity, and greater government interference—it is not surprising that many companies are not building so aggressively for the future. However, it is our view that the best companies are both strengthening and rationalizing their core, preparing to ‘attack’ their competitors and take advantage of others’ weaknesses in order to grow,” said Rhodes.

• Only about half of managers said that their companies are now undertaking significant and concerted “attacking” options. By contrast, two-thirds of market leaders are, in fact, beginning to think more offensively; yet only about 44 percent of “middle-market” companies—those typically with revenues of between $1 billion and $10 billion—are doing so.

• When executives at market-leading companies were asked in which categories they would be making significant efforts in 2010, only 41 percent said they are planning to increase R&D, only 35 percent are planning to hire new talent, and less than 40 percent are thinking of extending their geographic reach, expanding capacity, or exploring acquisitions.

• Only about a quarter of respondents from middle-market companies are planning to take any significant action in any of the categories above.

Said Stelter, “Company executives are viewing the economic outlook with more caution than the politicians are. But it’s important to remember that those companies that act decisively can significantly outperform even in the toughest of economic times.”