At year end it seems fitting to take a look at economic conditions overall, and what better source than the McKinsey Global Survey Economic Conditions Snapshot/December 2012?   It’s a compilation of 1,575 responses from executives “representing the full range of regions, industries, company sizes, tenures, and functional specialties,” and is weighted by the contribution of each respondent’s nation to global GDP in order to correct for diffrent response rates.

As might be expected from such a broad sample, views span the spectrum from optimistic to pessimistic, but on the whole executives are more positive than negative, albeit with regional differences.  Developed Asia, for instance, finds more people saying current conditions have deteriorated while in the traditional developed world a consensus that government isn’t doing what it can to support growth is widespread.

Amusingly, and in true Lake Woebegon fashion, respondents “broadly believe that demand for their companies’ products or services—as well as their companies’ profits—will increase in the next six months, despite their concern about sluggish global and domestic demand.”  Nevertheless, it seems clear that pessimism is waning and optimism rising as we pull farther and farther away from the 2008 meltdown:

McKinsey2012DecemberGlobalOutlook11

Turning to more specific threats or sources of unwelcome shocks, over 90% identify geopolitical risks in the  Middle East and North Africa (Egypt, Libya) as worrisome while 70% (82% in the US) say US economic growth will suffer if the country goes over the fiscal cliff.  More alarmingly, fewer than 1 in 5 respondents believe the US will avoid that trajectory.

This chart has a great deal of data on it (which I actually admire as an armchair student of the visual display of quantitative information), but to simplify comprehension I invite you to focus only the darkest blue, top—and current reading—bars.  The story it tells becomes rather simple:

  • Asia-Pacific (which does not include China or India) seems to be suffering schizophrenia, going from optimistic a year ago to pessimistic since then and back to optimistic again in the most recent reading;
  • Developing markets, including China and Latin America, seem reasonably stable in outlook with about half thinking things are looking up and the other half foreseeing no change or a deterioration;
  • The Eurozone is getting more and more pessimistic;
  • India is the reverse, becoming more hopeful;
  • And as for North America, it’s hard to discern a meaningful trend, with consensus bumping along much as it is in the developing markets, with roughly half hopeful and the other half split fairly evenly between status quo and deterioration.

McKinsey2012DecemberGlobalOutlook2

Next up is prioritizing what’s impeding growth.  What’s of interest here to me is not what the risks are (the usual suspects) but the wide divergence in their weighting from one region to another.  For example:

  • In the Eurozone, low consumer demand is seen as a problem by 2 out of 3 respondents, but in India only 1 in 5 feel the same;
  • 47% of Indian respondents see “transitions of political leadership” as  problematic, but only 14% in North America;
  • “Lack of access to credit” is seen as a problem by 50% in the Eurozone, but just 14% in Asia-Pacific.

But draw your own conclusions:

McKinsey2012DecemberGlobalOutlook11


Now, let’s turn to the US and the looming “fiscal cliff.”  With less than four days to go at press-time here it’s looking all but certain no deal will be reached. and our political incumbent protection society leadership appears to be slouching towards impasse.

I don’t know about you, but I think the fundamental premise of Congress’ imposing the potential fiscal cliff on itself was psychologically flawed. The working assumption surely was that it would be such an appalling event that no one could possibly permit it to come to pass.  Now we know that was mistaken, as the powers that be in Washington, who presumably have their hands on the wheel if anyone does, appear to be aiming straight for it.  What happened?

I think it was a Psychology 101 mistake: The closer an event comes to reality, the more accustomed we are to the possibility/probability it will actually occur.  We know this occurs even when facing our own imminent death (given enough time to come to terms with it, at least, and to work through the stages of grief).  The awful and unthinkable slowly morphs into the expected and manageable. And so here we are.

Now, how bad might it really be?

All that can be said is this is an experiment we’ve never run before, so no one really knows.

In lieu of sheer speculation—if you’re in the market for that you know where to find it—let’s close out the year with a few deeply informative charts putting large economic trends in perspective.

First up, and these are all courtesy of the WSJ’s Top 10 Economic Charts of 2012, here’s a snapshot of the composition of US GDP from the post-WWII era to today.

2012DecemberWSJUSGDPPostWWII

There are a couple of large stories told here.  First, the relative share of goods and services have swapped places since 1949: Goods used to absorb 36% of GDP and services 27%, and now the ratio is more than turned on its head, with goods at 24% and services at 47%.

Federal and state spending have also swapped places, with federal declining from its post-WWII/Cold War high and state and local growing, although their combined share has stayed remarkably constant (21.2% in 1949, 20.2% today).

Now let’s look at another major economy, Germany’s. If you had the impression it’s the economic engine of the Eurozone, you would be right. In spades. The cumulative message of these charts comes through loud and clear.

2012DecemberWSJGDPEurozone

It’s an awful time to be a worker in Spain, Greece, or Italy—and horrendous if you’re under 25.

2012DecemberWSJLaborUnemp

The combined impact of the first two charts expresses itself in this one, which shows Germany’s strongly growing economy and controlled labor costs contributing to a growing surplus in its current account (the broadest measure of international trade). My surmise is that the only reason the “peripheral economies” deficits have begun to shrink is that their overall level of economy activity is depressed.

2012DecemberWSJCurrentAccounts

Lest you think this is all a merely academic exercise in comparative macroeconomics, it’s not. These charts tell a powerful story about where you should be investing your practice area and geographic resources—at least if you believe in following the money.

 

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