The outlook for the global economy is finely poised. Most economies have shown resilience during much of this year. But there have also been emerging signs of slowing growth more recently, even before recent events in Israel.
Amid such uncertainty, a unique guide to the outlook to global prospects is provided by businesses themselves. The Oxford Economics Global Risk Survey is designed to provide timely information about the economic perceptions and expectations of businesses around the world. Since 2016 the survey has canvassed the views of Oxford Economics' clients, including some of the world's largest companies. Based on our analysis of the Q1 2020 survey, the participating companies collectively employ around 6 million people and have a total turnover of around US$2 trillion.
The latest evidence from the survey suggests that developments in Israel have had a significant impact on perceptions of global economic prospects. Businesses have become notably more pessimistic over the outlook.
Importantly, we are able to quantify this shift in business sentiment. This reflects key differences between the Global Risk Survey differs from typical polls of businesses. For a start, most survey-derived indicators are not easily related to key economic variables. They usually provide a rough guide to the change in business views - as reflected in net balances or diffusion indices derived from the number of respondents to have become more positive or more negative during the past month or quarter - rather than expectations about the actual level of activity in the global economy.
In addition, business sentiment has two key components - confidence and uncertainty about the economic outlook. The typical business indicator only measures confidence levels, telling us nothing about businesses' uncertainty regarding their central outlook.
While business surveys generally don't tell us about the outlook for key economic variables or business uncertainty around this outlook, the Global Risk Survey is different. In the Global Risk Survey, businesses are asked about the probabilities that they attach to global growth lying within different ranges for the current and subsequent calendar year. As a result, the Global Risk Survey allows us to quantify exactly how much business sentiment is changing - and the extent to which such changes are reflected in changing business confidence or business uncertainty.
During the pandemic, our regular Global Risk Surveys highlighted the importance of considering both components of business sentiment. In particular, both confidence and uncertainty changed dramatically in the early stages of the pandemic.
In early 2020, businesses generally saw a relatively high chance of positive, moderate global growth. By April of that year, most businesses were significantly less confident. This adverse confidence shock was reflected in their substantially reduced central expectations for global growth. Many businesses were also significantly more uncertain, with the shock to uncertainty indicated by the increased probability attached to outcomes far from those central expectations.
The ebbs and flows of business sentiment are best summarised by the Global Business Sentiment Index. This index aggregates quantitative responses in the Global Risk Survey in order to estimate businesses' average expectation for world GDP in a year's time, as well as their uncertainty about this central outlook.
The evolution of the Global Business Sentiment Index over the course of 2023 tells us a great deal about how businesses are viewing economic prospects in the year ahead. Back in April, the index fell as businesses downgraded their growth expectations on the back of concerns over strains in the banking system. At this time, businesses also reported that they viewed the risks to global growth as increasingly weighted to the downside. Nearly half of Global Risk Survey respondents viewed either a marked tightening in credit supply or a full-blown financial crisis as the top risk in the near term, while more than half cited these risks as very significant in the medium term.
Businesses saw a material risk that such developments could trigger a severe downturn. Survey respondents on average judged there to be around a 1-in-3 chance of a full-blown financial crisis comparable to the global financial crisis.
Within six months, however, the Global Business Sentiment Index had recovered significantly. Businesses still thought world GDP in a year's time would be significantly weaker in a year's time than they anticipated prior to the coronavirus pandemic. But the scale of the expected shortfall had become markedly lower than at the height of banking concerns.
Business uncertainty over the economic outlook also eased. One indication is the small probability attached to severe weakness in the global economy - by September, businesses judged only a 1-in-50 chance of 2024 growth turning out as weak as during the global financial crisis.
Perhaps most striking of all, however, is how uncertain businesses felt compared with prior to the spread of Covid-19. Our estimates imply that businesses were no more uncertain over the global economic outlook than they were prior to the pandemic.
In recent weeks, business sentiment has shifted again. Against the backdrop of developments in Israel, businesses have once more downgraded their expectations for global growth and become more concerned over the risk of significant economic weakness.
Unsurprisingly, business perceptions of the key threats to the global economy have also shifted. Businesses' banking system concerns have eased significantly from earlier in the year. But geopolitical tensions are now believed to pose the greatest risk to the global economy in both the near term and medium term.
Interestingly, businesses appear more concerned over relations between China and Taiwan than developments in the Middle East. One reason is a concern that China-Taiwan tensions could potentially trigger significant deglobalisation of trade and the financial system. Throughout this year, the risk of deglobalisation has remained a prominent medium-term risk in the Global Risk Survey.
Overall, businesses currently see moderate growth as most likely this year and next. But the balance of risks is perceived to lie to the downside. Oxford Economics judges that there's a greater chance of growth disappointing in the year ahead than of a strong rebound. The evidence suggests that businesses are similarly cautious over the outlook for the global economy.
