Tempered economic optimism

Michael Alan Hamlin

Posted on February 24, 2010

A just-released economic snapshot survey conduct by McKinsey Quarterly suggests that most managers globally expect their companies to grow profits this year, and that improved profitability will primarily come from increased demand rather than further reductions in costs. Notably, managers in emerging economies are even more optimistic about 2010 than their peers in developed economies.

Globally, 74% of 1,467 respondents in the February survey expected profits to increase this year, up from 46% in a previous survey conducted in December 2009. Only 12% of respondents expect profits to contract, down from 38%. Sixty percent of respondents who expect profits to rise anticipate an increase in customer demand, and have stepped up sales and marketing efforts as a result.

However, managers remain focused on fundamentals. Fifty-four percent of respondents said they intend to increase productivity as a step to managing effectively in the “new economy.” And 47% of respondents are working to reduce operating costs and management of pricing. But innovation is also important. Forty-eight percent of respondents said they intend to introduce new products or services in an effort to gain market share from weakened competitors.

Most respondents expect an increase in gross domestic product, 84%, up from 57%, and 57% said current economic conditions are substantially or moderately better than six months ago, up from 51%. However, the number of respondents who expect economic conditions to be substantially or moderately better at the end of the first half of 2010 decreased to 59% from 69%, suggesting that optimism among respondents is tempered.

Managers in developed markets are especially worried about consumer demand, and globally almost half of respondents said constrained global markets will perpetuate imbalances while 22% said global markets remain susceptible to imbalances. The McKinsey analysts note that the source of economic concern for managers in developing markets is “a different story.” Those managers worry that high commodity costs and strengthening currencies are the biggest threat to growth.

In Southeast Asia’s emerging markets, currency appreciation appears to be the principal concern, while managers in India fret about commodity prices. The results are not broken down by country in McKinsey’s summary, but in the Philippines currency appreciation-the product mostly of a surprising record level in remittances from overseas foreign workers-concerns exporters of both products and services.

Semiconductors and electronics, which account for about two thirds of exports, are under enormous price pressure even as global demand begins to expand. Managers in the Business Process Outsourcing (BPO) industry also operate on thin margins, and an appreciating peso erodes price competitiveness in an increasingly competitive industry. Fortunately for BPO managers, the Philippines’ reputation for excellent customer service and quality service delivery in general somewhat ameliorates the impact of a stronger peso on overall competitiveness.

Because the Philippines has such a small manufacturing base, rising commodity prices don’t have the negative impact they would on a major export economy, but they still hurt. Rising oil and coal prices, for example, increase the cost of electricity. The Philippines has the second highest electricity rates in Asia. Poor agricultural infrastructure-and protectionism-results in some of the highest food prices in Asia as well, putting upward pressure on wages.

For Philippine managers, there is likely also another worry: the upcoming National Elections in May. Preliminary results of a survey currently being conducted by the Business Processing Association of the Philippines (BPA/P), Outsource2Philippines (O2P), and TeamAsia indicate that while a smooth transition of power will have a positive effect on investor and client perception of the Philippines in the view of a large majority of respondents, a failure of elections will have a negative impact on investor and client perception.

The complete results of the survey will be presented in a breakfast briefing for industry leaders next month (Disclosure: BPA/P is a client of my firm, TeamAsia, and I am a director and shareholder in O2P.). When they are, two central findings are likely to be apparent. First, as the McKinsey survey appears to show, in the perspective of BPO managers, the economic outlook can best be described as one of “tempered optimism.”

Second, there are threats, including an appreciating peso to worry about, and continued concern with labor supply and wages. But among the risks is that which is not just economic, but political.

(Michael Alan Hamlin is the managing director of TeamAsia and a Manila-based author. His latest book is High Visibility: Transforming Your Personal and Professional Brand . Write him at mahamlin@teamasia.com and follow him on Twitter, Facebook and LinkedIn.)

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