Seventy percent of all respondents around the world say that they expect the United States will have entered a recession six months from now, and 83 percent expect a US slowdown to have a somewhat or very negative effect on their national economies over the next year, according to the latest McKinsey Global Survey on economic conditions.¹ These responses were gathered during the first half of March as the credit crisis continued to expand and drive down stock markets around the world, as oil prices climbed to record levels, and as employment and consumer-spending reports in the United States pointed to a weakening economy.

However, the percentage of respondents who expect their home economies to be negatively affected by a US slowdown is slightly lower than the nearly 90 percent of respondents who currently report at least a moderate degree of linkage between those economies and that of the United States. Indeed, though the US economy has been the long-time driver of the global one, only 21 percent of executives around the world report that the linkage between their national economies and the United States has tightened over the past three years.

Meanwhile, the executives’ fears of inflation have risen, and the proportion of respondents who expect to be able to raise prices has fallen. Overall, 41 percent expect economic conditions in their industries to deteriorate, compared with only 23 percent six months ago. Yet respondents are slightly more positive about their industries than about their countries: 46 percent expect economic conditions in the latter to deteriorate, compared with only 13 percent six months ago. Respondents in China stand out as the most positive: 61 percent expect better economic performance from their country in the near term.

Ties to the United States

There is a notable discrepancy between how linked to the United States executives say their home economies are and how concerned they are about a US slowdown (Exhibit 1). Although executives in China report the third-highest degree of linkage in the survey, they are the least likely to express concern about the repercussions of a US slowdown: 64 percent of the respondents in China expect it would have a somewhat or very negative effect for their economy, compared with 84 percent of respondents in the rest of the world. The Chinese may be less concerned because of their country’s increased exports to developing economies and because exports to the United States account for only 7 percent of China’s GDP. Even so, it’s not surprising that respondents in China (75 percent) are far likelier than those in any other part of the world (16 percent) to say that the linkage between their economy and that of the United States has increased over the past three years (Exhibit 2).

Almost all executives in the neighboring developed economies of Asia² view financial problems in the United States as an instigator of future economic trouble in their own economies. In addition, compared with executives in other parts of the world, those in the Asia-Pacific region are particularly pessimistic about the prospects for their industries given a slow US economy, more than 89 percent of them expect a slowdown to have a somewhat or very negative effect, compared with 68 percent of respondents elsewhere (Exhibit 3).

Inflation, investments, and hiring

Given their gloomy economic expectations, it’s not surprising that respondents in the developed economies of Asia are the least likely to say that in the next six months their companies will make capital investments or invest in research and development, mergers and acquisitions, or even human capital—one of the top organizational challenges for companies, according to other McKinsey research.³ In fact, more than a quarter expect to decrease their investments in R&D and talent. In most respects, the survey indicates that companies are less likely to increase their investments than they were even three months ago (Exhibit 4). Notably, the proportion of executives reporting that their companies will make capital investments dropped 10 percentage points in only three months. Human capital remains the area in which executives are likeliest to increase investment, with nearly 40 percent saying they will.

Executives in Asia and North America are the least likely to say that their companies will hire over the next six months (Exhibit 5). Among the minority of respondents who expect their workforce to decrease, 40 percent cite layoffs as the main reason behind that expectation.

Over the past six months of economic turmoil, executives’ fears of inflation have increased substantially: 72 percent of respondents to this survey expect higher inflation over the next six months, compared with 39 percent six months ago (Exhibit 6). However, executives don’t expect to gain more power to increase prices during the same time period.

In fact, 43 percent say they will have less power to increase prices, compared with 29 percent only three months earlier (Exhibit 7). Respondents in Europe, who are less likely to say that their economies are tightly linked to the US one than most other respondents, are more likely to say that their pricing power will remain the same (50 percent) than decrease (35 percent). Executives in the Asia-Pacific region and China say that the main factor preventing them from increasing prices is a large number of competitors. Executives in Europe and North America who don’t expect to be able to raise prices identify the economic slowdown as the chief barrier.