ACCA - The global body for professional accountants

Global Economic Conditions - Q2, 2014

Sentiments seen to be a result of good fundamentals and strong government spending

Kuala Lumpur – Malaysia has been one of the few major markets to have genuinely recovered in the second quarter of 2014, according to the largest economic survey of finance professionals around the world organised by ACCA (the Association of Chartered Certified Accountants) and IMA (the Institute of Management Accountants). 

The latest findings of the Global Economic Conditions Survey (GECS) show that access to growth capital improved substantially in the quarter, reaching its best levels in at least two and a half years, and there were signs of a slow return to financial stability, with inflation and exchange rate volatility falling. 

Additionally, cashflow and demand conditions improved, in line with the broad trend of the last fifteen months. The result was a strong rebound in business capacity building and a smaller uptick in opportunities for inorganic growth, but with growth in the rest of the region facing strong headwinds, opportunities for organic growth fell. 

Although this development would normally tend to depress business confidence, it has been balanced out by expectations of stronger medium-term growth in government expenditures.

In response to these broadly benign readings, business confidence rose to the highest levels in a year – rivalling the post-election highs of Q2 2013. 18% of respondents reported confidence gains (up from 12%), while 28% reported a loss of confidence – down from 49%. 

Manos Schizas, Senior Economic Analyst at ACCA and editor of the survey, said: “The macro economic outlook has also returned to post-election levels of euphoria: 37% of GECS respondents in Malaysia believe conditions are improving or about to do so, up from 27% previously, while the pessimists made up 55% of the Malaysian sample, down from 63%.” 

Global Outlook

Globally, the economic recovery has once again run out of momentum, according to the GECS.

Business confidence fell marginally in Q2 2014, and is becoming increasingly reliant on financial stability. ACCA and IMA believe that this is a sign of mounting risks for the future of the recovery. 

Although the change in business confidence between Q1 and Q2 2014 is statistically negligible, this apparent stability is the result of dwindling business opportunities and an improving investment environment cancelling each other out, according to the report’s findings.

The survey shows that there is growing business dynamism around the world, with North America and South Asia leading the charge in terms of capital spending, new orders and headcount. Conversely, Africa and the Middle East fared worst, with all three areas either falling or stable. 

Overall, most of the world’s confidence boost appears to be coming from North America, as well as a temporary rebound in Central and Eastern Europe, but improvements in these regions were balanced out by receding optimism throughout Asia, Western Europe, Africa and the Middle East. Post-Taper, emerging markets are still underperforming in crucial areas such as access to growth capital, but the gap between them and the more developed markets is now narrowing. 

One positive sign for the Asia Pacific region and beyond is that China’s prolonged slowdown is now starting to bottom out, which should be good news for a range of suppliers and commodity producers worldwide. 

On a country-by-country basis, it is clear that much of the recovery in business confidence is temporary. For instance, encouraging figures in China and Russia were boosted by the signing of a series of major long-term trade and investment deals, while fieldwork closed before the loss of flight MH17 and its aftermath, which will certainly depress confidence in Central and Eastern Europe in Q3. 

Despite relatively good news from the real economy, the survey also revealed that the first half of 2014 had been a very depressing time for major Western banks, and became more so in the second quarter. GECS figures for large financials in the US and Europe suggest that confidence in the sector retreated sharply in anticipation of tougher stress tests, rising interest rates and falling property prices, geopolitical risks and the threat of tougher regulatory enforcement.

Schizas concluded: “After a year of solid improvement in 2013, it’s clear that 2014 is not going to be anywhere near as benign for the global economy. Many of the sources of good news in 2013 – including large financials and ‘austerity survivors’ such as the UK and Ireland – are turning negative again. The Chinese slowdown, which has been a constant drain on the global recovery, may be coming to an end, but the looming geopolitical risks in Eastern Europe and the Middle East are likely to prove just as damaging in the medium term.”