Executives’ optimism about the economy has continued to grow over the past month and a half, according to the results of a McKinsey Quarterly survey in the field during the week that US stock markets hit their highest point so far in 2009.1 More companies are pursuing a range of growth initiatives than were doing so six weeks ago, and the proportion expecting increased profits this year has risen to 40 percent, from 33 percent. Similarly, the share of those saying that their nations’ economies have improved since September 2008 has risen, though only to 26 percent, from 20 percent.
More executives—42 percent—pick the description “battered but resilient” for the global economy than any other. Yet their other responses indicate that they see the economy as battered enough to prevent a large-scale economic recovery from arriving anytime soon. The share expecting an upturn to begin in 2009, for example, has fallen to 20 percent, from 28 percent, over the past six weeks, and the percentage of respondents who think that their national economies will be better at the end of the year—37 percent—equals the percentage who think their national economies will be worse.
In addition, this survey asked executives which of their companies’ responses to the crisis have been effective and which will continue over the next year, as well as what new activities they’ll undertake in the current economic environment. Although 57 percent of the executives in an earlier survey thought their managements’ overall response to the crisis had helped their companies,2 respondents to this survey are more skeptical about the specific actions their companies have taken. Most actions, from cost cutting to restructuring, are thought to have been at best only somewhat effective at helping their companies weather the crisis.
How companies have coped
A strong majority of the companies reduced their operating costs since last September, but only a bit more than half of the respondents say that doing so has been very or extremely effective in helping their companies weather the crisis (Exhibit 1). Far fewer companies have hired talent that would not otherwise have been available, but the majority of those that have done so deem it a very or extremely effective move.
A big part of many companies’ lower operating costs came from workforce reductions, but a notable 41 percent of respondents to this survey say their companies haven’t had any since last September. There are distinct differences on this point between small, private companies and large, public ones.3 Half of the executives at the former say their companies have not cut jobs, and fewer than a quarter say they will do so during the rest of 2009. In contrast, nearly three-quarters of executives at large, public companies say they’ve cut staff, and half say they will cut more this year. The cuts so far have fallen most on frontline employees and support function staff, though at large, public companies, across-the-board cuts were as frequent as those focused on support staff.
How to cope with the crisis
A plurality of the respondents says that “battered but resilient” is the best description for the global economy during the rest of 2009.4 These respondents also identify the top three responses by their companies as changing the mix of their products or services to reach new customers, reconfiguring their organizations to meet future needs, and building or conserving cash reserves. Indeed, regardless of which type of future that companies expect, changing the mix of products or services is a top priority, suggesting that the crisis may be spurring innovation.5
Cautious focus on growth
Just over half of the respondents to this survey say they expect their companies’ overall financial position at the end of 2009 to have improved from its current state. More executives now feel optimistic about their companies’ 2009 profits now than were so in June, with roughly equal shares currently expecting an increase or a decrease (Exhibit 2).
Another sign of financial improvement is that while the proportion of companies seeking external funding has remained stable, the share getting all the funds they’ve sought has risen to above half—53 percent—from 47 percent in June. The share seeking funds to refinance debt has increased since June, consistent with a slight loosening in credit markets generally.
Executives expect their companies to remain financially cautious over the next 12 months—vast majorities of those that have already cut costs or increased hedging, for instance, will continue to do so. Yet they also indicate some room for growth. More than a third of their companies, for example, plan to stop cutting capital investments over that period (Exhibit 3).
Better profit expectations
To be continued?
Indeed, almost all of the companies are now actively seeking growth, and more are doing so in more ways than they were just six weeks ago (Exhibit 4). Among specific actions companies might take in response to the crisis but haven’t yet, many more plan to introduce new products or services or to search for M&A opportunities than plan to start cost cutting or other defensive actions. This finding indicates both that most companies have cut costs already and that more are seeing opportunities.
Actively seeking growth
However, these hopes for growth remain tempered. For example, compared with six weeks ago, a much smaller share of respondents now expect demand for their companies’ products or services to decrease, but the share expecting an increase has barely ticked up. The biggest rise is in the proportion of executives expecting demand to stay the same.
The economy at large
Overall, thinking about financial and other effects of the crisis and their companies’ current position, just over two-thirds of respondents expect their companies to emerge from the crisis stronger. When that will happen is much less clear. While executives indicate that the economy as a whole is healthier now than it has been in some time, they don’t expect much further improvement soon.
Respondents’ views on a range of trends affecting businesses and the economy are slightly more optimistic overall than they were in June, and notably more optimistic than they were in March, the low point (Exhibit 5). Similarly, the share of executives saying that their nations’ economies are better off now compared with last September is notably larger than it was six weeks ago. But the share expecting improvement in economic conditions by the end of 2009 has barely changed (Exhibit 6) and more than twice as many executives still expect their nations’ GDPs to fall in 2009 as to rise. (However, the share expecting a fall has dropped slightly, to 63 percent, from 67 percent.)
Trending toward improvement
Tempered optimsm
Although 37 percent of the respondents do expect economic conditions to be better at the end of this year than they are now, conditions are so poor that only 20 percent of all respondents expect an actual economic upturn in 2009, a fall of eight percentage points in six weeks. Even when stock markets are booming, it seems, executives think there’s still a long way to go.
