in

OUR BEST IDEAS, QUICK AND CURATED | JULY 29, 2022

View in browser

This week, we look at how consumer sentiment is faring in Europe and the United States as inflation takes hold. Plus, tracking the move to the cloud in China, and an economic geographer explains what makes cities and regions dynamic.

How inflation is flipping the economic script, in seven charts

Concerns about inflation are growing globally, as rising prices continue to exceed forecasts. In a recent McKinsey Global Survey on economic conditions, inflation topped the list of perceived economic hazards in respondents’ home countries. The United States and European nations have been particularly affected, while Asia overall is seeing less dramatic price increases (although inflation in India is running at about 7 percent).

How are consumers faring in this uncertain environment? In Europe, economic confidence is continuing to tumble, according to a McKinsey survey of European consumers. Rising prices have outpaced the invasion of Ukraine as the primary worry; across the continent, consumers hold a negative view of the state of the economy and of prospects for recovery. When asked to identify their number-one concern, 53 percent of European consumers cite price increases, up from 44 percent in an April survey.

Trading down. European consumers are buying items in smaller quantities or delaying their purchases. The number of consumers who say that they have changed their shopping behavior continues to grow, from 68 percent of respondents in April to almost three-quarters in June. Many are turning to private labels, discounters, or more affordable brands. The survey also revealed that most European respondents have no immediate plans to treat themselves. While there are small differences, these trends hold true across France, Germany, Italy, Spain, and the United Kingdom. Baby boomers are the most cautious in this regard, with only a quarter making plans to splurge. Gen Z is the only group where the majority of consumers intend to treat themselves with clothing purchases or eating out.

Confidence game. A McKinsey US Consumer Pulse Survey conducted this spring found that despite recent headlines of sky-high inflation, consumer spending and confidence remained surprisingly strong. American consumers also expressed more confidence than those in any of the 14 countries McKinsey surveyed. Yet higher prices were driving some consumers to spend differently, with about a third switching to private labels. Since then, consumer confidence has plunged, with July numbers showing a key index at its lowest levels since early 2021. 

Level-headed. McKinsey’s experts have examined many of the strategic implications of inflation, including offering seven charts that illustrate its worst effects. Rising prices have, at a minimum, altered the economic mood in many countries and could reset the global growth trajectory for years to come. For consumers and companies alike, preparing for an inflationary period (or a broader economic downturn) can help mitigate some of its worse effects. In a new article, McKinsey’s North America managing partner, Asutosh Padhi, and his coauthors discuss how US companies can build resilience and thrive in the next cycle. 

OFF THE CHARTS

Cloud in China: The outlook for 2025

While industries with numerous tech-savvy and digital-native companies, such as e-commerce and education, have shifted a significant portion of their IT workloads to the cloud, others have not—notably, the labor-intensive industrial and manufacturing sectors, which contribute more than a quarter of China’s GDP. But that could change quickly as the government focuses on boosting digitization and productivity in both industries.

PODCAST

The bold moves that change careers

Corporate attrition persists, but one way to win employees back is to develop their knowledge, attributes, and experiences—in short, their human capital. But how can companies determine what’s best for employees? And how much value can greater internal mobility among workers create? McKinsey partners Anu Madgavkar and Bill Schaninger, coauthors of the recent report Human capital at work: The value of experience, answer these questions and more in this edition of The McKinsey Podcast.

More on McKinsey.com

The dawn of a new biomedical R&D era | Science and technology are driving breakthroughs at each stage of the biomedical R&D value chain. These advances could soon be harnessed to design precise therapies to treat and prevent countless diseases at a much more rapid clip.

Five ways to increase your board’s long-term impact | Directors are spending more time on their work, yet few say that their boards are better at creating long-term value. Survey data highlight the operating models that correlate most with value creation.

The beauty battleground: The sprint to win on services | Beauty companies looking to capitalize on fast-evolving trends should act on the growing convergence of brands that offer beauty products and brands that offer services.

INTERVIEW

What factors make a particular place successful?

There is no single factor that makes a place dynamic. Things that make a city or region dynamic today may not make it dynamic in a few years’ time. Most of my friends in urban economics would tend to say that big cities are typically successful places. That combination of agglomeration and density in big cities has made them highly dynamic throughout history.

But cities have come and gone, and they have periods of high growth and low growth. London, for example, has been very prosperous and, especially over the last quarter of a century, very dynamic. However, that has not always been the case. From the 1930s until the mid-1990s, it had a worse economic performance than the rest of the UK.

Cities and regions have to reinvent themselves constantly. To do that, they have to have the right human capital, the right accessibility, and the right infrastructure that can also adapt to different conditions. Having the right institutions is crucial: weak institutions will prevent talent and innovative capacity from emerging.

Many countries have opted for devolution or decentralized administration as a way to shore up regions that are lagging behind. How effective is that trend?

When we look at the returns of devolution across the world, especially in terms of economic growth and employment generation, it’s not that decentralized governments have been far more successful than centralized governments.

In fact, in many parts of the world, and especially in parts of the developing world, decentralization has been an outright disaster. Not because decentralization, per se, is bad. Decentralization can deliver far greater returns because it matches policies to the needs of people that might vary.

The main problem with decentralization is that it’s normally done at the wrong time and with the wrong methods. Most countries decentralize in periods of political and economic crisis. Meaning that it’s done top down, without strong demand or strong capacity by local governments. Often, central governments are reluctant to transfer resources. As a result, we end up with what is known as unfunded mandates—limited resources for the number of tasks that local governments have to do. Therefore, they end up doing them not particularly well.

You’ve written compellingly about ‘the revenge of the places that don’t matter.’ What do you mean by that?

Everything is intertwined. So when you have economic problems, they sooner or later become serious political problems. We’re seeing this trend in the developed world and in many parts of the emerging world.

Let’s take France as an example. Over the last quarter of a century, only the region of Paris has grown above the national average. That means that all other regions have grown below the national average. That is a phenomenal process of economic polarization in a country that remains highly prosperous.

In China, economic polarization increased rapidly in the second half of the 1980s and throughout the 1990s, with very rapidly growing coastal areas and big cities around the coast, and a much less dynamic inland. What did the Chinese government do? It tried to promote development inland with more active policies, including by developing infrastructure and investing strategically in research facilities inland to improve the quality of education and training.

We need to have dynamic big cities, dynamic medium-size cities, and dynamic small cities, towns, and rural areas. Because when we have that, we maximize talent and innovation and help to minimize the polarization that leads to political tension.

— Edited by Barbara Tierney

Share these insights

Did you enjoy this newsletter? Forward it to colleagues and friends so they can subscribe too. Was this issue forwarded to you? Sign up for it and sample our 40+ other free email subscriptions here.