Research from Grant Thornton’s International Business Report (IBR) reveals that business leaders globally are less optimistic about the economic outlook than at the start of the year, despite continuing rises in expected revenues. The dip in optimism suggests that the global economic cycle may have peaked. Business leaders should therefore consider using increased revenue to structurally invest at this stage of the cycle to ensure long-term prosperity.
Global optimism dips, but revenue projections are rising
Global optimism in Q2 2018 stood at net 54%, a drop from the record high net 61% figure reported in Q1 2018. Some of the largest drops in optimism were seen in the EU, where optimism for the region fell from net 60% to net 46%, and in Africa, where business confidence fell from net 82% to net 62%.
The drop in optimism is prompted by concerns around international trade, the impact of rising interest rates, and political uncertainties. In the EU, businesses are increasingly concerned about the rise of populist parties and the impact this may have on eurozone projects and future trade rules. In the Americas, developments such as US protectionism and a potential trade war with China are disrupting established trade dynamics, creating both uncertainty and opportunity. Businesses are increasingly concerned about the rise of populist parties and the impact this may have on eurozone projects and future trade rules.
In the Emerging markets are increasingly wary of the impact rises in US interest rates might have, as the proportion of businesses citing exchange rate fluctuations as a constraint is increasing. In emerging Asia Pacific, 35% of businesses cite exchange rates as a constraint, up 5pp from the previous quarter. Outside the Asia Pacific region, Brazilian businesses also have an eye on exchange rates with 33% citing it as a constraint (up 4pp from 29%).
Among the world’s two biggest economies, there was a divergence between the US, where optimism dropped 11pp to net 78%, and China, where it increased 14pp to net 79%. With ongoing around trade barriers stoking fears of a trade war with the US, Chinese businesses don’t seem to be affected. Fundamentally, the Chinese economy is in good shape with consumers seeing a boost in real earnings growth through 2017-2018 and much improved trade performance in early 2018.
Despite the fall in optimism, businesses remain confident about their performance over the next year, with many having a positive outlook for revenues. Globally, net 59% of businesses expect an increase in revenue over the next 12 months. In the US, revenue expectations increased to net 76% from net 61% and in China they rose to net 62%.
Economic cycle reaches its peak, but structural investment remains flat
The drop in optimism globally suggests that the economic cycle may have peaked. Leaders should look ahead and consider investments now to ensure their longer-term business prosperity and protect against looming threats. As access to skilled workers is seen as the biggest constraint to growth by 40% of businesses globally, business may also need to invest to improve productivity of workers they have.
According to Francesca Lagerberg, Global Leader Network Development at Grant Thornton: “There is a sense that 2018 may be as good as it gets for the global economy. Optimism has clearly been dented after two years of it steadily climbing. However, businesses and policymakers need to look at how they are preparing for the next phase of the global economic cycle.”
Investment indications have held stubbornly flat despite rising revenues. Research and development is steady at 22%; investment in technology increased by 1pp to 48%; investment in plant and machinery increased 4pp; and investment in new buildings experienced a steady global increase of 2pp. Expectations for increased investment in all these areas have remained the same over the past two years.
Structural growth can help business prepare for the future
Against the backdrop of looming US interest rate rises, ongoing trade disputes and the end of quantitative easing in the EU, businesses would do well to structurally invest to counter the risks presented by the next stage of the economic cycle.
As Francesca Lagerberg explains, “Despite the small quarterly uptick in investment expectations, businesses are not increasing their levels of investment to a point which will help them ride out the economic shift economists predict we are about to see. Even with increased revenue expectations, they are not making plans to invest for structural growth. This could exacerbate the impact of any downturn if these predictions come to fruition.
“If we are entering the end of a global cycle, businesses need to rapidly increase their investments and put their expected increased revenues to work to fix the roof while the sun is shining.”
Contact us to find out more or download Grant Thornton's latest International Business Report (IBR).