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Happier New Year

Executives around the world see glimmers of hope for the economy, but it depends on what part of the world you are in.

By  Coletta Kemper

As Oscar Wilde once noted, “Experience is simply the name we give our mistakes.” If the mistakes made leading up to the 2008 global financial meltdown offer any indication, we can rest assured that our financial and political leaders do not suffer from lack of experience.

In any event, it’s a brand new year, ample reason for renewed optimism. According to a global survey by McKinsey, business executives are more optimistic about the economic outlook in their respective countries than they were just over a year ago. Nearly half of those surveyed said they expect the good news to continue and GDP growth to return to pre-September 2008 levels in 2010 and 2011.

But not so fast. McKinsey points out that optimism varies by region. Executives in North America were generally more confident that the crisis would end sooner than their counterparts in other regions. Executives in developed Asian countries were the most optimistic, while those Gloomy Gusses in Europe the least so.

A majority of the executives said economic conditions have improved since September 2008, but only 19% said the economy has turned around. That number jumps to 33% among executives in the developed Asian economies. More executives in that region than in any other developed area said the best description of the global economy through the first quarter of 2010 is “regenerated global momentum.” And everywhere except Europe, more executives said the economy over the next several months would be “battered but resilient,” reflecting a view that we’re on the road to a recovery that could be long and slow. A third of those surveyed described the economy as “stalled globalization,” and 20% said they expected a fairly quick recovery.

We’re not out of the woods yet. Even though the overall economic news is brighter, the executives were less optimistic about their own companies’ short-term prospects. While most expected to see profits in 2009, they did not see a change in their workforce through at least the first quarter of 2010.

The biggest obstacle to growth over the next year, the executives said, is low consumer demand. This finding certainly reflects what most economists are saying, that low consumer demand will slow growth. Without consumers buying, companies won’t increase production and can’t grow. If they don’t grow, they won’t hire.

The survey also shows that the recovery is uneven across industries, with some doing better than others. Although nearly two thirds of all survey respondents said their companies weren’t in crisis, 45% of those in the manufacturing industry said they were. That’s in comparison with 28% in the financial services sector. Also, executives in manufacturing were more likely to say their companies are reducing the workforce and expecting lower profits than any other industry executives. According to McKinsey, a new normal is settling in—an environment that will be less “comfortable” for business than the pre-crisis one.

Glimmers of hope are on the horizon. The executives are more optimistic about their companies’ long-term prospects. The survey showed that for the first time in a year some companies are beginning to shift out of “survival” mode and are again planning for the future. Last year companies hunkered down and focused on cutting costs and reducing inventory, capital investment and workforce. Now, product development and long-term planning are high on the priority list of many businesses.

Nearly three quarters expect their companies to be stronger in five years than they were before the economy collapsed. Even though many continue to cut back, fewer see it as a top priority. An equal number of executives reported that their companies are restructuring to position themselves for growth and to reduce costs.

The executives also see major changes coming for their industries and economies over the next five years. And executives believe government will play a bigger role in both. The executives are still looking to government for assurance. Across industries, the executives said government should continue supporting the economy albeit at a scaled-back level.

Other changes include more consolidation and innovation in their industries. Those who expect to be stronger in the future more often said they are focusing on flexibility, new products and long-term planning. They also said they expect their industry to consolidate. For better or worse, the crisis has helped wean out the competition. This should help many companies strengthen their positions as the economy recovers.

Innovation was a major theme in the survey. The majority of executives said innovation is more important for growth than it was before the crisis.

In other good news, the executives believe that globalization and international trade will expand. At the height of the crisis, countries restricted trade in an effort to protect local markets. That trend seems to be reversing. In the next five years, the executives said, they also expect to see more integration in financial markets.

Here’s to a happier new year in 2010 than we had in 2009.

Kemper is The Council’s vice president of Industry Affairs.

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