Corporate Expectations Barometer: Progress report

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1 : A report from the Economist Intelligence Unit Sponsored by

2 Preface Corporate Expectations Barometer: is an Economist Intelligence Unit report sponsored by SAP. The findings and views expressed do not necessarily reflect those of the sponsor. The Economist Intelligence Unit s editorial team executed the survey and wrote the report. Kim Andreasson was the editor and project manager. Nigel Holloway was the project director. Jazmine Atienza created the cover image and Mike Kenny designed the report. The quantitative findings presented in this report are based on an online survey, conducted in May 2009, which asked executives and managers around the world about their expectations of business prospects over the next 12 months. The results were used to create the baseline for the Corporate Expectations Barometer, an ongoing index of business perceptions. An online survey has been conducted since June, posing the same set of expectation questions as in the baseline survey. The results feed into the barometer, creating a longitudinal view of evolving business expectations. The barometer is part of an ongoing programme of research tailored to executives coping with rapidly changing business conditions. The programme s online home is Our thanks are due to all survey respondents for their time and insight. January

3 Introduction When the Corporate Expectations Barometer was launched, it was anyone s guess how an online survey of business perceptions would fare in predicting the future. The May 2009 baseline report showed that businesspeople were cautiously optimistic about the coming year. But were they being too optimistic? Was the worst of the recession yet to come? Eight months later, it seems that respondents hopeful outlook has been warranted. Stock indices such as the Dow Jones Industrial Average and FTSE 100 have risen, and GDP growth in most major economies has picked up. But systemic risks in banking and other sectors remain. And a jobless recovery in developed markets, wherein the economy expands but unemployment remains high, is also a risk. This paper examines trends in the Corporate Expectations Barometer over the first eight months of the programme. Among the findings: A brighter outlook. Business sentiment is gradually improving, in line with GDP growth in most parts of the world and rebounding stockmarkets. To executives, prospects are improving across the board: from the expectation for one s own company to the global economy as a whole. Trepidation remains. It is clear from the monthly questions that although the trend has been positive, business sentiment remains somewhat muted in some areas as the durability of the economic recovery is uncertain. GDP growth is being driven by public spending and inventory restocking, both of which may be unsustainable. And even as many have benefited from industry bailouts, companies are concerned about the longer-term implications of deficit spending. Distrust in financial services underscores another obstacle to a sustainable recovery increased bank lending. About the research The baseline online survey of expectations was conducted by the Economist Intelligence Unit in May 2009 of 1,032 businesspeople from 88 countries representing a variety of industries. The survey asked respondents for their views on business conditions over the next 12 months in five areas: their company; their industry; their country; their region; the world. The Corporate Expectations Barometer is a weighted average based on how respondents assess business prospects in these five areas. The five questions from the baseline survey are contained in an ongoing survey, the results of which are used to update the barometer on a monthly basis. The online survey also poses two topical questions, which change every month. This report looks at the barometer, and several of the topical questions, over the eight-month period from May to December To download the Corporate Expectations Barometer: Baseline report of expectations, and to take part in the ongoing programme, please visit: www. eiu.com/sponsor/barometer. 3

4 A brighter outlook On a scale of 1 to 10, with 10 being the most positive expectation, 1 being the least, and 5 being neutral, sentiment started in May at an average of 6.3 and rose slowly but steadily to 7.1 in October. By December it had waned slightly to 7.0 (see chart below). Corporate Expectations Barometer May-December May June July August September October November December Source: Economist Intelligence Unit, The barometer is a weighted average of five scores: respondents expectations of business prospects for their company, their industry, their country, their region and the world. Over the course of the programme, scores increased in all five areas (see table). May 2009 December 2009 Overall index an average of the five scores below Company score prospects for your company over the next 12 months Industry score prospects for your industry over the next 12 months Country score prospects for your country over the next 12 months Regional score prospects for your region over the next 12 months Global score global business prospects over the next 12 months

5 As the US economy and euro zone began to recover and Asia resumed strong growth, expectations for global business prospects made an especially long stride, from 5.9 in May to 7.3 in December. Expectations remain highest for the unit closest to home: the respondents own company. Here the index grew from 7.1 in May to 7.5 in December. The reasons may be that companies are starting to feel the savings from earlier cost-cutting measures and are now planning for future growth, aiming to take advantage of low asset prices to expand and acquire. In another positive sign, 29% of survey takers in July said they expected their company s workforce to grow over the coming year, whereas only 19% expected it to shrink. Over the coming twelve months, how do you expect the size of your company s workforce to change? Our workforce will grow 29% Our workforce will stay about the same size as today 52% Our workforce will shrink 19% Source: Corporate Expectations Barometer survey, July Much like the stockmarket, a confidence index measures expectations. Unsurprisingly, therefore, the barometer s trend line follows that of the rebounding stockmarkets. Over the May-December period, the world s major indices moved upwards, albeit from a deep trough (see chart). Stock markets, US Consumer Confidence, and Corporate Expectations Barometer trends, May-October 2009 (May = 100) 125 NIKKEI 225, adjusted close price Dow Jones Industrial Average, adjusted close price FTSE 100, adjusted close price Corporate Expectations Barometer US Consumer Confidence Index May June July August September October November December Source: Economist Intelligence Unit,

6 Barometer survey takers, like the investors driving stockmarket prices, certainly have cause for optimism. Although global GDP contracted in 2009, it is predicted to increase in The Economist Intelligence Unit forecasts real global GDP growth (at market exchange rates) of 2.6% in 2010, up from -2.3% last year. Global growth will be fuelled by a rebound in North America (2.5%), a more modest rebound in Europe (0.9%) and strong growth in Asia (4.4%). Compare these figures to last year s dismal estimates: -2.5% in North America, -4.1% in Europe and 0.1% in Asia. Each month, survey takers were asked to predict GDP growth for the coming year. Over the course of the programme, they foresaw better results (see table), coming closer to the Economist Intelligence Unit s forecast for global GDP growth forecast May 2009 December 2009 Survey takers average forecast 0.2% 1.8% Economist Intelligence Unit forecast 2.1% 2.6% A note of trepidation Yet nervousness remains. Although many companies now expect to hire, this prospect comes on the heels of major downsizing initiatives. Unemployment in developed economies remains high, and productivity gains may preclude a full rebound in employment to pre-recession levels. A jobless recovery would dampen consumer spending, particularly in the US, affecting export-dependent developing economies. Current GDP growth driven by public spending and holiday-season private consumption is also tenuous. Although US consumer confidence picked up in the fourth quarter of 2009 (see chart above), and holiday sales edged ahead of those in the previous year, Americans will not return to pre-recession levels of spending in Households lost tremendous wealth in the real estate market, and the focus will remain on debt repayment rather than consumption. Meanwhile, fiscal stimulus packages spending on infrastructure, unemployment benefits, industry bailouts and the like put forward in the bleakest days of the recession are now starting to bear fruit. To take just one example, nearly one-third of survey takers, representing industries as diverse as financial services, manufacturing and technology, said that their company s bottom line was affected by the automotive industry bailouts (see table below). Is your company s bottom line affected by the automotive industry bailouts? Yes, directly affected 6.5 % Yes, indirectly affected 24.5 % No 64.0 % Don t know 5.0 % Source: Corporate Expectations Barometer survey, July

7 Massive public spending is unsustainable, however. US and European governments cannot afford additional waves of stimulus equivalent to those launched in Mounting deficits will lead to budget cuts and executives are wary of the impact on businesses. In October, the Corporate Expectations Barometer asked survey takers: which is more important, stimulating economic growth or curbing government deficits? While a majority leant towards growth, a large percentage (36%) sided with curbing deficits. The proportion is even higher in North America, where budget gaps have left some states struggling to remain solvent. In November, the Pew Center on the States, an American think tank, reported that ten states, including California, Florida, New Jersey and Illinois, are in fiscal peril. In Asia, deficits are smaller and seen as less worrisome. Strong growth in the region particularly in China, but also in South-east Asia and India has been led by government spending. Continued spending, especially in China which has enormous cash reserves, will allow growth in the region to continue to outstrip that of more developed economies. Which do you think is more important: curbing government deficits or stimulating economic growth? All respondents Respondents in Respondents in Respondents in North America Western Europe Asia-Pacific Curbing government deficits 36% 43% 37% 22% Stimulating economic growth 60% 53% 60% 69% Don t know 4% 4% 3% 9% Source: Corporate Expectations Barometer survey, October Since growth in the US in the second half of 2009 was driven by one-off factors, the Economist Intelligence Unit expects the US rate to soften later in 2010 and 2011 (see table below). World growth and inflation World summary (%) Real GDP growth (market exchange rates) World North America Western Europe Transition economies Asia & Australasia (incl Japan) Latin America Middle East & North Africa Sub-Saharan Africa World inflation (av) Source: Economist Intelligence Unit global forecast (December 2009). 7

8 Long-term growth depends on increased bank lending. But faith in the financial sector remains low. In September, the Corporate Expectations Barometer asked respondents whether they trusted their country s financial institutions more or less than they did six months previously (a time when confidence was at a low, following a spate of bank failures and government bailouts). Only 16% reported feeling more trust, whereas 29% felt even less trustful. Worryingly, respondents in financial services were even more down on their industry: 36% said they were less trustful. Respondents in the US and Western Europe, where the banking crisis hit especially hard, were more pessimistic than respondents in Asia-Pacific (see table below). Compared with six months ago, do you trust the financial institutions in your country more or less today? All respondents Respondents in the financial services sector Respondents based in Asia-Pacific Respondents based in North America Respondents based in Western Europe More 16% 19% 19% 16% 14% Less 29% 36% 19% 29% 35% About the same 54% 46% 59% 54% 51% Don t know 1% 0% 3% 1% 0% Source: Corporate Expectations Barometer survey, September

Conclusion Optimism drives business. It spurs investment, innovation and risk-taking. Just as investors react to positive economic indicators, the economy reacts to positive investment.

9 Conclusion Optimism drives business. It spurs investment, innovation and risk-taking. Just as investors react to positive economic indicators, the economy reacts to positive investment. But a complex global economy cannot run on optimism alone. Over its first eight months, the Corporate Expectations Barometer loosely followed the trajectory of the world stockmarkets, trending gradually upwards. Will the barometer be like the stock-market often is a leading indicator, foretelling economic expansion to come? Or will it be as the stock-market occasionally is misguided, a bubble of enthusiasm that ignores systemic risks? Time will tell. For now, the barometer remains a valuable tool for businesspeople to gauge the mood of their peers in a turbulent global economy. 9

10 Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsors of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper. LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) Fax: (44.20) NEW YORK 111 West 57th Street New York NY United States Tel: (1.212) Fax: (1.212) /2 HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) Fax: (852)

The global economy in Grant Thornton International Business Report

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