Accountants’ survey shows high inflation and low investment is hampering recovery | ACCA | ACCA Global
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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
—Manos Schizas, senior policy adviser, ACCA

Rising inflation and flat investment have kept the world’s economic recovery stuck in reverse, the latest Global Economic Conditions survey from ACCA (the Association of Chartered Certified Accountants) 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. 

Global findings

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.'

UK findings

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 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.

South Asia findings

Finance professionals in South Asia recorded an overall loss of confidence in the last quarter, with only one in four (25%) respondents saying they were more optimistic about the prospects of their organisations than they had been three months earlier. Half of the region’s respondents believe that global economic conditions are deteriorating or stagnating. 

However, even this relatively poor performance represents an improvement over the last quarter. In fact, for many months now respondents in South Asia have been surpassed only by their colleagues in Western Europe for economic pessimism. 

Some of the reasons are relatively obvious. First, the region is heavily affected by rising inflation; Pakistan in particular emerged as the worst-affected among ACCA’s major markets, with 78% of respondents citing increased operating costs. Second, fiscal sustainability remains a problem, with 35% of respondents in the region (up marginally from 34%) expecting dangerous deviations from what they saw as the correct level of government spending in the medium term (5yrs).

Then there are worrying changes to the fundamentals: business failures multiplied significantly in the last three months, and investment appears to have fallen substantially, even though business incomes have not changed substantially and access to finance appears to have improved marginally. Volatile foreign exchange rates and inflation also posed challenges for a growing number of firms but they cannot account for the continuing loss of confidence. Rather, the problem appears to be that respondents see ever fewer opportunities for their businesses going forward, especially of the more value-added kind. Opportunities to invest in quality and customer insight, for instance, were much less frequently cited than even three months ago. 

Africa findings

African finance professionals have been the most optimistic in the past year, but the slowdown in both Western nations and the Far East is finally starting to take its toll here as well. 

While overall confidence is still rising, only 41% of respondents reported any gains in confidence the last three months, down from 47% in the previous quarter. Respondents in the region still think that the global recovery is on track, with 62% believing that economic conditions are either improving already or about to do so.

This makes Africa the most optimistic region in ACCA’s survey by a significant margin.

But, at first glance, it appears that respondents aren’t being confident enough, given positive developments on the ground. Cashflow conditions appear to have improved in the last three months, with fewer respondents reporting concerns about customers going out of business or problems with access to finance and late payment. 

Business revenues appear to be improving as well and new orders still appear to be forthcoming, while inflation has remained constant. As a result the outlook for investment and employment in Africa has improved significantly.

Looking forward, however, respondents in Africa are spotting fewer profitable opportunities, which explains the slowing confidence gains. Only opportunities based on exploiting innovation appear to be multiplying. In the medium term, government spending is expected to grow strongly, but 17.5% of respondents expect dangerous levels of overspending, up from 12.5% in the last quarter. In fact, perceptions of the sustainability of fiscal policy have taken a sharp turn for the worse after nearly two years of continuous improvement.

North America and Caribbean findings

Confidence is still rising in North America, where 37% of respondents reported confidence gains, but at a much slower pace than in the last quarter when 45% did. In the Caribbean, ACCA’s confidence index returned – barely- to positive territory, with 30% reporting confidence gains (against 31% in Q1). 

Faith in the global economy is slightly more pronounced in North America, where over half of all respondents (54%) believe the global recovery is on track, against 50% in the Caribbean.  Confidence levels are converging because respondents in North America appear to be increasingly affected by problems accessing finance and cashflow concerns, while in the Caribbean the outlook for demand and employment is improving.

Another key difference between the two regions which might explain this convergence is the influence of fiscal policy – in the Caribbean respondents expect government spending to rise significantly in the medium term and believe such fiscal policies will be more or less sustainable, while in North America spending is expected to fall significantly and yet respondents are more likely to feel that the adjustment is not sufficiently ambitious.

Western Europe findings

Western Europe has lagged the rest of the global recovery since ACCA’s surveys began, and remained the most pessimistic region for another quarter. Only one in four (25%) respondents believe the global recovery is on track, and only one in five (20%) reported confidence gains in the last three months.

These findings may appear particularly negative, but they actually represent only a moderate loss of faith in the global recovery and no acceleration of the loss of confidence. This is due to a mild improvement in business revenues and access to finance, and an increase in the availability of profitable opportunities across the board. In response to this, the outlook for investment, in particular, has improved significantly and labour market conditions are also improving.

Respondents in the region still expect government spending to fall very sharply over the next five years, but not as sharply as in previous quarters, as fears of excessive underspending have continued to subside. Only 10% of respondents expected this in Q2 2011, against 12% in Q1 2011.

Ireland remains the most pessimistic ACCA market in Western Europe: only 16% of respondents feel that the global recovery is still on track and 42% reported a loss of confidence in their organisations, against only half that percentage (21%) who reported gains. Confidence is also very low in Cyprus, considering Cypriot respondents’ more optimistic views on the global economy, and the recent tragic events in are almost certain to push confidence in the island nation even further down.

Asia-Pacific findings

The latest survey recorded the first ever net loss of confidence in the region since ACCA’s surveys began more than two years ago. Of the major ACCA markets, Hong Kong and Malaysia seem to be particularly affected, while the Chinese mainland has managed only a small loss of confidence. Only Singapore has bucked the trend by recording further confidence gains. 

ACCA believes that this quarter’s findings have been heavily influenced by the catastrophic events in Japan; overall, more respondents in the region still believe that global economic conditions are improving or about to do so (49%) than the opposite (41%). But the report also notes that there is a wider trend at play; the region’s accountants have seen ever smaller confidence gains in the last two years and the recovery in Asia is being delayed by the Western world’s continued economic malaise. 

Inflation continued to rise throughout the region, with 71% of respondents reporting rising operating costs for their organisations and clients, up from 62% in the last quarter. Of course it is not just ACCA that is worried by this trend; authorities in many parts of the region are reigning in the supply of credit, which is the survey suggests is currently growing at its slowest pace in 18 months. Respondents in the region have revised their expectations on medium-term (5yr) government spending downwards as they prepare for further government efforts to control inflation.

As a consequence of the continued monetary tightening, the share of respondents in the region who reported problems accessing finance (32%) rose significantly compared to the last quarter. The share of respondents reporting falling income and problems due to volatile exchange rates also rose. Fortunately these problems are not (yet) putting undue strain on cashflow and businesses don’t appear to be failing at a faster rate, while last quarter’s marginally negative trend in investment also remained unchanged.

Opportunities, however, have continued to present themselves to accountants and their employers. In the latest quarter, respondents saw increased opportunities to profit from changes in customer behaviour, and despite subdued demand in the last quarter they see more opportunities to increase orders in the immediate future.

Middle East findings

The view of finance professionals in the Middle East suggest that access to finance is particularly tight in the region, with 54% of respondents reporting problems. Cash flow problems are also significant; more respondents (23%) are worried about suppliers going out of business here than in any other ACCA region. As a result of the two, the outlook for investment is very subdued. On the bright side, this region appears to be less affected by inflation than any other, although a third of respondents still cite this as a problem.

Still this quarter’s data are likely to mark a significant improvement over the last quarter – with 42% of respondents reporting confidence gains and 53% believing that the global recovery is on track, the Middle East is ACCA’s most confident region and second only to Africa for economic optimism. This is partly due to the fact that respondents expect government spending to increase substantially in the medium term and generally feel that expansionary fiscal policy would be sustainable: only about 2% expect dangerous levels of overspending.

The outlook for employment is very volatile, with respondents in the region more likely to report both staff cuts and new job creation than anywhere else. Foreign expansion, stronger business partnerships and cost cutting appear to present the most opportunities for businesses, while respondents here also see more opportunities for their organisations to profit from changes in customer behaviours and needs than those in other regions.

Central and Eastern Europe findings

For the time being, the region appears to be riding out the storm of the European fiscal crisis, even though respondents’ confidence in their own organisations and their faith in the global recovery are slowly being eroded.  About 45% of respondents in the region (down from 50%) feel that global economic conditions are improving or about to do so, but only 26% reported confidence gains (virtually unchanged from 27% in the last quarter). 

Business revenues, access to finance and cashflow conditions are now increasingly stable, which has prompted a rise in capital spending in the region. That said, the outlook for employment and investment in staff is still negative.  Respondents are reporting more opportunities to profit from innovation and customer insights and fewer opportunities to cut costs or encourage efficiencies through the supply chain. 

Respondents in the region expect government spending to grow moderately over the next five years, a prospect that now appears more sustainable than when the question was posed in previous surveys. Only about 8% expect their national governments to over-spend dangerously in the medium term, down from 14% in the previous quarter.