Business Climate Survey: optimism amid uncertainty.
Fifty-six percent of executives surveyed believe that instrument sales will improve moderately in the next six months. This is a considerable increase when compared with the Spring Business Climate Survey (see IBO 6/15/06), in which only 38% of executives believed that instrument sales would increase moderately, and much more of an improvement from last fall, when only 29% of the surveyed executives believed that instrument sales would increase moderately. Thirty-six percent of the respondents to this fall's survey predict that sales will remain the same.
This response runs counter to expectations of CEOs as measured by a number of different indices. The Goldman Sachs Confidence Index, which is generated from chief executives' analyses of business conditions, declined to 42 (50 marks the halfway point between a positive or negative evaluation of conditions) in August, and has reached a four-year low in the United States at 39. A quarterly US confidence index published by Vistage, an organization of chief executives, reached its lowest point in three years this September. This index studies the reported confidence of chief executives of small and medium-sized US companies. Furthermore, fewer than half of the 2,000 respondents said that they would augment their capital expenditure over the next year. And according to a study of 70 leading CEOs released in October by the Business Council and the Conference Board, 45.6% of those surveyed think that the economy will decline in the next six months, compared to 41.2% that believe that the economy will improve. Seventy-one percent of the CEOs forecasted that the US economy would grow between 2.1% and 3% in 2007.
These predictions are similar to those made by the IMF for the US and other developed economies. The IMF's projection for world output in 2006 is a 5.1% increase in global GDP, fueled in part by countries such as China and India. This is a 0.3% increase from the previous projection in April. Growth in 2007 is expected to decline slightly from 2006 to 4.9%. As the graph above shows, growth rates are not predicted to increase in any region of the world between 2006 and 2007, partially due to increasing inflation and increases in the prices of oil and metals. Growth in the euro area is expected to drop from 2.4% in 2006 to 2% in 2007. Germany in particular is expected to have a sizable decrease in growth rate during this period due to an upcoming tax increase. Overall, advanced economies are expected to grow 3.1% in 2006 and 2.7% in 2007, while the economies of developing countries are expected to grow 7.3% in 2006 and 7.2% in 2007. Developing Asia, which includes China, India and the ASEAN-4, is expected to post 8.7% growth in 2006 and 8.6% growth in 2007. Potential challenges to the world economy mentioned by the IMF in its report are the possibility of oil prices continuing to rise, significant downturns in the US housing market and a further rise in inflation.
IBO was also curious about executives' concerns regarding the instrument business. When asked what the biggest threats to the growth of the instrument industry were in the next six months, of the six choices given, 56% of those surveyed chose economic factors as the greatest threat. Other choices were competition, financial considerations (e.g., operational costs), regulatory concerns, political events and technical considerations. The executives gave mixed answers when asked to specify their areas of concern. More than one cited currency exchange rates, and one executive believed that the slowdown of the economies in China and India was a problem. Respondents also mentioned changes in US GDP and interest rates as issues. At a distant second, tied at 16%, were sociopolitical factors and competition. The war in Iraq was presented as a specific sociopolitical concern and competition from China was offered as a particular worry.
IBO also asked about sales prospects to particular regions and countries and how they would change in the next six months. It is interesting to consider the relationship between the survey participants' response to this question and the forecast of the IMF. Answers were given in the form of a number between 1 and 5, with 5 representing improving conditions, 3 representing stability and 1 representing worsening conditions. Asia/Pacific, China and India had the highest ratings, which resonates with the IMF's projections for the areas. The average rating for the Asia/Pacific region was a 4, with 65% of the respondents answering with a 4 rating, and 17% each responding with ratings of 3 and 5. Rest of World and North America both received high numbers--80% and 84%, respectively--of 3 ratings. The overall average was 3.3 for the regions on the survey.
Respondents were also asked how instrument sales to specific industries would fare in the next six months. Again, those surveyed rated prospects on a scale from 1 to 5. The industries that generated the highest ratings were pharmaceuticals and biotechnology, with average ratings of 3.6 and 3.8, respectively. Forty-three percent of those answering the question gave pharmaceuticals a 3 rating and 13% gave it a 4 rating, while 13% gave biotech a 5 rating, the most ratings of 5 of any industry. The average rating for all industries was 3.2, indicating a general prediction of holding steady, in contrast to the responses to the survey's first question, which asked how instrument sales would change over the next six months. Sixty-four percent of the respondents to this question predicted "moderate" growth or "substantial" growth, while 36% predicted a "decline."
Biggest Potential Threats to Instrument Industry Growth in the Next Six Months Competitive 16% Economic 56% Financial 12% Sociopolitical 16% Note: Table made from pie chart.
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|Publication:||Instrument Business Outlook|
|Date:||Oct 15, 2006|
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