Impact of Macroeconomic Shifts on Industries Around the World
August 30, 2011. There are clear indications of weakening economic conditions in mature economies,
driven by high unemployment and government budget imbalances. Recent
market events, including the downgrading of government debt by rating
agencies, are signs that governments in developed economies are no
longer capable of contributing to economic growth. The overarching
sentiment in the world economy is that of uncertainty. Is there
anything that we can say for sure?
We ask Aleksi Grym, Director of Products & Services at GIA who is also an economist, for some comments.
What is your take on global economies at the moment?
”What ultimately drives any economy is employment and household expenditure. In most developed economies, unfortunately, households are currently weak. Unemployment is high, income is not growing, and a large proportion of income is used to service debt.
This is the situation in the USA, UK and much of Europe in particular. On the other hand, households are relatively strong in many Asian economies such as China and Japan, and Russia and Brazil are also looking fairly positive.
What we have recently seen is public finance in most developed economies reaching its limits. We can no longer expect governments to contribute to economic growth in Western developed economies.
Business investments have also been relatively slow, despite the fact that companies have lots of liquid assets available to seize investment opportunities should such arise. But since companies are uncertain about how much households can afford spend on goods and services, they are very cautious about expanding. What we can expect, however, is a wave of mergers and acquisitions in many industries, since the idle capital that many companies are holding needs to be put to work.
Finally, some countries can benefit from a relatively positive export climate. Globalization is continuing, as companies are expanding to new markets and seeking efficiencies from global supply-chains. This will likely keep up a positive momentum in world trade. What is more, some countries, such as USA and UK, have the benefit of a weak currency.”
Which industries will be most affected?
“In general, the industries mostly likely to be more resilient are those that provide basic goods and services and necessities.
Industries which have relied on government support or stimulus, such as construction or financial services, are likely to face some challenges in the near future.
|
Severely challenged
|
Relatively resilient |
| Construction | Pharmaceuticals & healthcare |
| Financial services | Energy, resources & environment |
| Manufacturing & industrial | Telecommunication, technology & media |
| Automotive | Consumer & retail |
However, there are winners in every industry. In the current economic climate, the strongest companies are likely to have the following characteristics; innovative, market-driven products and services, aggressive M&A strategies and strong positions in emerging markets, or any of the above.”
What are your views of the household strengths in some key economies?
“Unemployment is persistently high in most developed economies and is the key impediment to economic growth. In many European countries, substantial structural reforms are needed before employment can revive – this means that economic growth will be subdued for a long period of time. Meanwhile, households are hurt by rising prices driven by global demand for resources. Households in developed economies are also over-leveraged, meaning that any increase in income will only marginally increase demand for goods and services, since part of the income is used to service debt.”
How do you see global trade and investment climates?
“The key driver for exports is household demand, which we know will remain weak for the foreseeable future. Nonetheless, the megatrend of globalization will continue to drive more companies to internationalize and to seek efficiencies from global supply chains.
Countries vary substantially in their exposure to global trade. For example, France and USA have only small export sectors and will benefit less from relatively favorable export conditions. UK and Germany, on the other hand, can benefit greatly.
However, companies are currently reluctant to invest due to two reasons. Firstly, there is too much uncertainty about future demand for goods and services. Secondly, there is already overcapacity in many sectors due to overzealous investment previously.
On the other hand, investment conditions are also favorable due to two reasons. One, interest rates are very low and will remain low for a long time, while financing is widely available. Companies have hoarded cash to better withstand potential disturbances in credit markets. As a result, if investment opportunities arise, such companies can be expected to seize them and act quickly.”
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