By Daniel Hunter
New research from the Grant Thornton International Business Report (IBR) indicates that businesses in mature economies are betting on future growth, finally releasing their cash reserves and beginning to invest again.
This comes as global business optimism, spurred on by improving order books, is up to its highest level since early 2011. The investment mood change is welcome evidence of businesses deciding that now is the time to lay the foundations for growth.
IBR data reveals that business leader investment plans, particularly in mature economies, have leapt sharply over the past three months. In the European Union (EU), 44% of business leaders now plan to increase investment in plant and machinery in the coming year, up from 26% three months ago. Businesses in the G7 (34%, up 7 percentage points), North America (33%, up 5) and the PIGS economies (42%, up 27) all report strong rises in investment expectations.
“Business leaders are feeling more confident about the macroeconomic environment and are increasing investment in the future growth of their operations. It’s a sign that the large corporate cash reserves we know had been building around the world since 2008 are being unshackled," Scott Barnes, CEO of Grant Thornton UK LLP, said.
“With the economic outlook so uncertain, business leaders have understandably adopted a ‘wait and see policy’ with regard to investment. This inertia has weighed heavily on growth in recent times and has seen corporate cash reserves climb to over $2 trillion in North America alone. This considerable investment firepower could now prove to be a potent force in driving growth in mature economies.”
The rise in optimism underpinning these expanding investment plans is equally as striking. Globally, net 27% of businesses are optimistic about the economic outlook, up from just 4% from the previous quarter. The three largest economies in the world have all seen sentiment improve. Optimism in the United States shot up from -4% in Q4 2012 to 31% in Q1 2013. In China business optimism rose from 19% to 29%, and the perennial pessimists of Japan improved massively from -70% to -2%. Confidence even seems to have returned in the troubled PIGS economies (-56% to 15%).
Further evidence in this shift in business outlook comes from IBR data showing that order books are filling up, especially in the mature economies. Globally, the proportion of businesses citing reduced demand as a constraint on growth fell from 38% to 26% between Q4-2012 and Q1-2013. In the G7 it fell by 20 percentage points to 19%, and in North America by 17 percentage points to 14%.
Scott Barnes added: “The world’s largest economies and those which have suffered the most in the last few years are unified by an outlook brighter than we’ve seen for some time. Fears around the ‘fiscal cliff’ dampened US business confidence in Q4 and avoiding it gave a boost to businesses — although of course the sequester of automatic spending cuts has since come into effect. In Japan, there is clearly a feeling that the new prime minister and governor of the central bank can return the economy to growth. China meanwhile looks set to outstrip its growth targets in 2013.
“However, the signs of growing demand, business confidence and investment plans are still developing. Full economic health is still some way off. The Eurozone’s period of stability has recently been unsettled by tension over the proposed bailout of the Cypriot banks. This incident alone shows how fragile confidence — and the investment plans that come with it — remains. Policymakers should be wary not to undermine it.”
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