By Marcus Leach
Rising inflation and flat investment have kept the world’s economic recovery stuck in reverse, the latest Global Economic Conditions survey from the Association of Chartered Certified Accountants (ACCA) has shown.
Of the 2,186 ACCA members surveyed around the world between 16 May and 6 June 2011, only 26% reported increased confidence, down from 28% three months ago, with 57% saying that economic conditions are either deteriorating or stagnating, up from 51% only three months ago.
Among ACCA’s major markets, respondents in the UK are the most pessimistic about the recovery after their colleagues in Ireland, and became marginally more so in the past three months.
The clear majority (72%) of UK respondents thought that global economic conditions were deteriorating or stagnating - the highest percentage in two years. Only one in five (20%) reported confidence gains in the second quarter of 2011, up from 18% in the previous quarter. These are very marginal changes, and still consistent with a very slow recovery.
Andrew Leck, head of ACCA UK says: “Although fewer respondents mentioned access to finance or late payment as problems, cashflow pressures increased in the last quarter, with an increasing number of respondents worried about customers or suppliers going out of business even though demand is still recovering from the soft patch of late 2010. This may have something to do with persistent inflation — which is now the most commonly cited business challenge in the UK. Investment has yet to recover from the sharp correction in the third quarter of 2010 and in fact capital spending appears to have fallen marginally once again, but on the bright side the outlook for employment improved significantly in the last quarter.”
He added: “Attitudes towards austerity continue to evolve in the UK and overall the feeling is growing that any belt tightening is not going to be as extreme as originally understood. Expectations of a sharp reduction in spending peaked in the third quarter of 2010, when 70% of respondents expected this to take place over the next five years, and have since fallen steadily — only 38% expected this in the latest survey. In fact, expectations are now very similar to those in the third quarter of 2009, when a much milder fiscal consolidation was being planned.”
Overall respondents see fiscal policy in the medium term as less of a balancing act than they did in past quarters, with only 9.5% expecting dangerous levels of under-spending, down from 13.2% in the previous quarter, while 3.4% expect dangerous levels of over-spending, up from 2.5%. Ratings of the government itself rose in the last quarter, though not quite to the heights of late 2010.
While the rocketing inflation of the first quarter of 2011 was not repeated in the second three months, a greater proportion of those surveyed, 54% - up from 51% in the last quarter - reported an increase in operating costs. This is double the number of respondents who mentioned inflation two years ago.
The survey shows that rising costs are not just confined to the fastest-growing economies.
While best performing markets Malaysia and Pakistan are leading the inflation league table, rising costs were also cited by 45% of respondents in Western Europe, which has been affected by the continent’s debt crisis, still sits at the bottom of the ranking in terms of business confidence and economic optimism.
The survey shows that businesses are becoming increasingly unable to respond to the inflationary challenge through cost-cutting.
Around 30% of respondents expect their governments to get spending decisions right in the medium-term, but 16.5% expect dangerous levels of over- or under-spending and this group has been growing every quarter since late 2009.
Access to finance has been tightening globally for the past six months, and this appears to be the case for both growth capital and short-term liquidity. This, combined with rising costs, now appears to be leading to an increase in the number of respondents who fear that customers (31%) or suppliers (15%) might go out of business, as well as those reporting problems with late payment (31%).
Despite these worrying trends, confidence figures among finance professionals have not yet dipped to a situation where they believe there will be a renewed downturn.
For the past two years, professionals in Africa and the Asia-Pacific region have been consistently more optimistic than their colleagues elsewhere about the state of the economic recovery, and this resulted in high levels of confidence in their own organisations.
In this survey, however, confidence is surprisingly low in both regions, with Asia-Pacific recording a net loss of confidence for the first time in two years. Hong Kong and Malaysia seem to be particularly affected, while Singapore has bucked the trend by recording further confidence gains.
While the gloom in the Far East reflects the fallout from the disaster in Japan, flagging confidence in Africa is mostly a lagged effect of the slowdown elsewhere. The GECS results show that the impact of a drop in activity in OECD countries has for the last few months been trickling down the supply chain, first to the Asia-Pacific region and then to Africa.
However, unlike the previous quarter, most of the pressure on access to finance appears to be concentrated on Asia-Pacific and the Middle East.
Under these challenging conditions, profitable value-added opportunities of most types have become scarcer and the investment environment has deteriorated slightly, especially in terms of financing and business support. Still, investment itself has remained flat and the outlook for employment and investment in staff has even improved slightly. This is almost certainly related to the slow recovery in new orders.
Report author Manos Schizas, senior policy adviser with ACCA, said: “There are a number of concerns in the latest report, including that the loss of momentum in Asia and Africa has become particularly pronounced in the last few months. The limits of austerity are also being explored in Western Europe and a renewed tightening of credit and cashflow conditions could be on the cards, even as new orders and employment are beginning to recover.
“If these new trends - coupled with high inflation and low investment - persist we would expect to see further instability in the near future, which will present more challenges for all sectors professional accountants whether they work in practice or industry in the second half of 2011.”
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