Karen A. Campbell is a senior economist at the World Economic Forum and a research fellow at the Wharton Risk Management and Decision Processes Center. Her team at the Forum — the risk response network — produces the annual global risk report, now in its eighth year. The Forum also gauges global confidence on a quarterly basis and constructs an Index of Global Confidence. Below is Campbell’s analysis of the latest changes in the Index.
The World Economic Forum’s Global Confidence Index rose to 0.48 in the second quarter from 0.43 in the previous quarter. Although this is a significant improvement over the previous quarter, it is still just below neutral to positive territory (a reading equal to or above 0.5). Confidence on the negative side indicates that there is still a perception that the global economy faces significant risks in the next 12 months as evidenced by the increases in the perception of the likelihood of a major disruption in three of the five risk categories this quarter. And indeed, it seems that there is daily news of slowing economies, geopolitical conflicts and cyber attacks.
Despite the seemingly dire news, the upward trend in the Confidence Index gives an indication that some of the uncertainties surrounding the risks are becoming clearer. For example, uncertainties surrounding the outcome and impact of the sequester battle in the U.S. have largely been resolved. The bailouts in the Eurozone continue to pose serious threats to the economy, but these too are more identifiable versus jittery speculations. Another indication of this: The VIX volatility index (also known as the “fear index”) is near its lowest level in five years (the low was reached on March 29th, 2013).
Four years after the financial crisis and recession, the changed environment that is emerging is perhaps becoming better understood. There is a greater appreciation for the interconnections of risks, which not only helps individuals and businesses manage these risks, but also reveals where new opportunities for strategic investment might be afforded. Furthermore, there is a growing sense that we are finally learning to harness the flood of information that ushered in the information age. We can thus reap greater productivity and development benefits from the digital revolution that aren’t yet fully captured in our current GDP numbers. A look at Google trends of the phrase “Big Data” shows the number of searches skyrocketing after a small dip in December 2012, but the trend really started steepening in late 2011. The highest search volume, which is set to 100%, was hit in April. Similarly, interest in the term “crowdsourcing” has been increasing since 2006, with the trend sharply rising in mid-2008.
While the information age will bring new risks, it also offers many new ways to deal with risks — from climate change with better energy efficient technologies, to income disparities through new mobile financial products that can provide greater financial access to millions still in poverty. It is also allowing many people to collaborate on finding solutions. Thus while the public sector is bogged down with legacy costs of the industrial age and geopolitical issues that continue to pose threats, the private sector is finding ways to partner on solving problems. (Note that the two risk categories that decreased in likelihood of disruption this quarter were social risks and environmental risks.)
A Factiva search of all news articles mentioning the word “entrepreneurial” shows that the average number of mentions per year from 2008 to 2012 was 51,013. Yet, in just the five months of this year, there have already been 42,648 articles mentioning “entrepreneurial,” or 84% of the average annual total over the past five years. This is almost to the level of mentions for all of 2007.
On the policy front, in Japan the structural reforms and determined monetary policy to end the third largest economy’s chronic deflation should give a boost to the global economy, particularly if new trade deals are forged that lower tariff barriers. There is also the enormous potential of younger populations in the emerging economies. Many have weathered the crisis and recession relatively better than the developed world, and their leaders are now looking to capitalize on these strengths through prudent governance strategies. The energy boon of shale gas for developed countries as well as increased energy generation from renewable sources in many developing countries is another potential boost to the engine of global growth.
Lastly, a look at the trend for “job interview” search interest may be offering another hint at the confidence reading. While search interest is seasonal, peaking in the spring and ranking lowest in December, this past December was the highest low since 2006. April 2013 search interest is at 81 — above where it was in April 2007 (77) and near its May 2007 peak (82).
Too be sure, many of the traditional macroeconomic indicators are still in the unhealthy range (e.g., high unemployment, high debt-to-GDP ratios, slow GDP growth rates, historically low interest rates), which means the potential negative impacts to the global economy are still weighing on confidence. Yet the upward movement in the index suggests that we may be gaining some traction on reducing uncertainties by finding the growth opportunities for strategic investments, which are now coming into focus.