Several weeks ago, the Economist released its global business barometer for 2008 (See Outlook No So Good, or click on the picture below). They polled 1,000 executives to get a sense of how those executives feel about the global economy. In that sense then, you can think of it as akin to a consumer confidence index for business.

Now, I’ve heard many arguments over the past several months that credit problems were largely contained to over-leveraged U.S. homeowners and banks. In some form, analysts had argued that this crisis had been about housing, mortgages, and bank earnings. Many analysts claimed that the corporate sector was sound, that corporate earnings had been solid, and that business investment would therefore keep us out of recession.

We’ve learned since that there have been spillovers from housing to other sectors of the U.S. economy – autos, durable goods, retail. But again, the argument (and a weak one at that) had been that we needn’t worry because corporate profits and corporate investment, and a strong global economy (outside the US) would save us.

Well, this barometer is pretty striking in that:

1. Business executives (outside the financial/housing industry) do not think they are immune. Readings are negative across all industries with the exception of IT.

2. Because this survey measures global sentiment, the so-called “strong” global economy is not likely to remain strong for long.

In my opinion, spillovers will be felt broadly, on both the supply-side and the demand-side. On the demand-side, faltering consumers will have an impact on the earnings of corporations of all types – either directly or indirectly. For example, retailers are directly impacted. However, the second order effect will be that firms in the textile industry will be affected as a result of decreased demand for retail clothing. Many of these textiles come from abroad. We should therefore expect more demand-side spillovers to a broader set of industries and a broader range of economies in 2008.

In addition to demand-side pressures, corporations will come under supply-side pressures in the form of access to capital from banks and other financial institutions. With less money coming into banks, there is less money to go out. Therefore, look for corporations of all types to have difficulty raising capital to fund business investment and ongoing operations. And with the banks and financial institutions throughout the globe (not just in the U.S.) feeling the pinch, lending will tighten in many countries.

All of this makes for a rocky Credit Crunchy© 2008 – whether at home or abroad.

This entry was posted on Friday, January 18th, 2008 at 5:18 pm and is filed under Business Strategy, Corporate Strategy, International Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.