The results of the Duke University/CFO Magazine Global Business Outlook survey for the first quarter of 2016 bring to mind the cautionary saying, “Red sky at morning, sailors take warning.” Finance and corporate executives in the survey are anxiously scanning the horizon for any signs of the red glow of a new recession. In particular, they are keeping a wary eye fixed on a stubbornly low-growth, low-inflation economic environment.
The survey, which concluded on March 4, generated responses from more than 1,600 finance and corporate executives from companies of all sizes, including 665 executives from the United States and Canada, 169 from Asia, 170 from Europe, 486 from Latin America (including Mexico), and 145 from Africa.
In the United States, executives believe that there is about a 3 in 10 chance that the U.S. economy will be in recession by year-end 2016, double the 16% chance predicted 9 months ago. They see the biggest risks coming primarily from the slowdown in China, and secondarily from economic slowdowns in other emerging economies and in Europe. But executives also are concerned about the uncertainty created by the unusually chaotic run-up to this November’s U.S. presidential elections.
These factors presumably underlie the slight downturn in confidence that U.S. executives have in the economy. Their rating of economic confidence dipped slightly in the first quarter, falling to 58.6 on a scale from 0 to 100 after two successive quarters in which it hovered around 60.
U.S. executives’ confidence in their own companies held steady at 66 on a scale from 0 to 100. But some warning signs are evident in the first-quarter survey. In particular, inflation remains extremely low — possibly too low. While this means that the U.S. Federal Reserve is reluctant to raise interest rates beyond nearly imperceptible levels, it also means that companies feel handcuffed when it comes to raising their own prices. U.S. executives are not expecting price increases to reach the 1% mark over the next 12 months, constraining the growth outlook.
At the same time, U.S. executives expect wages and salaries to rise by just over 3%, and health costs to rise by 7%. Feeling the squeeze between lower growth and higher costs, expectations for earnings growth have plunged this quarter, as have expectations for dividend payouts.
Executives from other parts of the world see similar risks for recession in their own countries. Perhaps most alarmingly, respondents from China peg the chance of recession before year-end at 33%, as do executives from Japanese companies. Capital spending is expected to increase over the next 2 months by only 2% in Japan and 4% in China, compared with about 7% averaged across the rest of Asia.
The confidence of Japanese companies took a sharp turn for the worse this quarter, plummeting to 44.5 out of 100 — lower even than the outlook in Africa (45.7). Executives from China are more hopeful, boosting the economic outlook rating back to 56.4 from a historical low of 47.7 at the end of 2015.
Similarly in Europe, finance executives assign a 30% chance of recession for their domestic economies by the end of 2016. Optimism about domestic economies declined to an average of 53 out of 100 this quarter, falling off from levels near 60 throughout 2015. European executives expect employment to remain flat over the next 12 months, and wages to grow only at the rate of inflation — an anemic 1.4%.
In Latin America, the situation has grown the most dire in troubled Brazil. There, respondents give the economy a 74% chance of falling into recession by year-end. Economic confidence is extremely low in Brazil and Chile, at about 37 out of 100, and employment levels are expected to contract in both countries.
Economic confidence is much stronger in Mexico (70) and Peru (63). Even so, respondents from Mexico also see a 30% chance of recession this year, similar to levels seen in the United States, Asia, and Europe.
Cost Cutting, Competition, and Blue Oceans
In this quarter’s survey, U.S. executives also weighed in on the steps their firms would take to remain competitive in an extended low-inflation environment. Opinion was divided on whether their companies would be helped or hurt by low inflation. When asked to assume that core inflation stayed between 0% and 1% for the foreseeable future, 35% of the respondents thought that the effect on their company would be positive, but 27% thought it would be primarily negative.
Executives from the smaller companies expressed concern that they would fall by the wayside, unable to compete with larger and better capitalized firms. But a little less than half of the respondents (47%) felt that the most severe impact of a low-inflation environment would be to substantially diminish their ability to raise prices to keep pace with rising costs.
In that regard, many respondents fell back on traditional responses to slow growth — cut costs wherever they could. For many, headcount was an obvious target. So, for example, an executive from the financial services industry wrote that his company would “curb and cut back on staff; freeze salary increases and bonuses; and rely more on outsourced staff.”
A respondent from the manufacturing sector summed up similar responses from many of his peers when he wrote, “We would work to reduce our operating costs as much as possible, including reducing headcount. We likely would be unable to raise prices, so we would need to be more efficient and effective in production to lower costs.”
However, in a market where everybody is doing the same thing, a more forward-looking strategy may well be to do something different. In that regard, a financial services executive advocated for the use of better sales analytics tools, in order to ferret out higher-yielding customers. In the manufacturing arena, a respondent said that his company would take “steps to increase productivity via plant floor automation and re-engineering our products.”
And a few visionaries foresaw the need for a complete change in business model. As one respondent wrote, to beat the competition his company would “need to make our product unique.” An executive from the services/consulting sector said that his company would “hire the best and the brightest and continue to pump cash into evolution of our product/service offerings,” while one from the wholesale/retail industry would “add a new line of products or services to go along with core products.”
And a manufacturer wrote that, after taking advantage of technology to reduce labor costs, his company would also “move more towards value-added manufacturing and away from low-value distribution.” Another peer from manufacturing said his company would “develop new products; add value to current products through R&D; extend the customer base; and look for blue oceans” — that is, competitive spaces that can be captured through innovative and unique product offerings rather than through market-share wars.
Such transformations, of course, demand a more aggressive strategic approach, a rigorous focus on implementation, and commitment to looking forward rather than back. For those companies, the time to start thinking about tomorrow is today.