KPMG’s Business Outlook survey shows a sharp decline in business optimism, weakening growth prospects and slowing job creation.
From June to October business confidence plunged to its lowest level since the financial crisis began in 2008/9 according to the latest edition of Pulse – KPMG’s Global Business Outlook Survey. Europe witnessed the most dramatic drop, with business sentiment hit strongly by the region’s ongoing debt turmoil. But this survey shows that gloom has spread across the globe, impacting both developed and emerging economies alike.
Commenting on the latest survey findings, Mark Goodburn, KPMG’s Global Head of Advisory, said: “Businesses around the world are grappling with massive uncertainty that is driving down sentiment across the board. This data categorically demonstrates that the world is in the midst of a prolonged and deep crisis of sentiment. Clearly, the European contagion has already spread and is exacerbating weaknesses in other economies around the world. In particular, the manufacturing sector has seen a substantial drop in confidence, likely reflecting their exposure to a weaker global trade environment.”
EU respondents in both the manufacturing and service sectors reported marked declines in optimism, falling to the lowest levels since 2009, when firms were still reeling from the post-Lehman global economic crisis. October’s Pulse results show that the two biggest Eurozone economies, Germany and France, have suffered further steep declines in confidence. Growth across the euro area periphery is also forecast to remain weak with growth in Greece expected to outright contract. In fact, sentiment has weakened since June in all European countries surveyed with the exception of Ireland.
Concerns about the knock-on effects from Europe, combined with a continuing softness in global economic conditions, have also taken a toll on growth expectations in the emerging markets. BRIC area companies signaled a drop in optimism for the second consecutive survey period, reaching the lowest level in about three years. Much of this deterioration is influenced by falling sentiment in China, which has seen a slowdown in domestically-led expansion as a result of policy tightening measures, making Chinese firms the least optimistic of the BRIC countries.
“While most expected sentiment to drop in the Euro-zone since our last survey, few anticipated the declines that we have seen from the emerging markets and BRIC countries, which were widely thought to have rounded the corner on the global recession. However, it is worth noting that both Brazil and India have bucked the trend somewhat, with small gains made in the confidence of the services sector, a good sign that domestically-led demand is helping these markets weather the storm,” added Goodburn.
Interestingly, US businesses remained among the most positive worldwide in their growth forecasts. However, confidence within the US market has dropped since June, with manufacturers in particular scaling back their expectations. According to survey respondents, lower business sentiment in the US reflects economic uncertainties both domestically and globally.
Manufacturing sector confidence
The latest survey results show that around 42 percent of manufacturers anticipate output growth during the coming 12 months versus 15 percent who expect a fall. The remainder reported either “same” or “don’t know”.
This is a downward shift from the previous Pulse survey (conducted in June 2011), where approximately 55 percent of firms predicted growth versus just 9 percent expecting a fall. Back in February, the corresponding figures were 61 percent expecting growth and 8 percent a decline.
Service sector confidence
In the service sector, approximately 44 percent of companies anticipate higher activity in a year’s time against 10 percent predicting a decline.
In June of this year, around 48 percent of firms predicted growth against 10 percent expecting a fall, while in February these proportions were 55 percent and 9 percent respectively.
In line with forecasts for weaker growth of business activity, business hiring plans have also been revised lower since June. So while a net expansion of employment is expected overall, the pace of job creation has been downgraded for the second Pulse survey in a row. Sentiment over employment is particularly weak in Europe, while job creation in Japan is also expected to remain soft.
As a result of diminished growth projections, forecasts for investment have also been downgraded in the latest Pulse survey. Prospects for investment are generally weaker in developed economies – and particularly in the EU – where companies are forecasting largely stagnant capital expenditure and only a marginal rise in R&D spend. For their part, however, BRIC firms continue to report the strongest investment intentions overall.
“Many markets are already suffering from a toxic mix of high unemployment, low investment and stubbornly high inflation,” added Andrew Cranston, Managing Partner, KPMG in Russia and CIS. “This has led to a cyclical reaction where lower sentiment causes firms to shelve their investment and employment plans which – in turn – further depresses the outlook. It seems that these challenges are not likely to go away any time soon and may, in fact, become more acute before they get better, particularly for globally integrated businesses and multinationals.”
The confidence of Russia’s businesspeople has fallen to levels not seen since the height of the economic crisis in April 2009. Respondents dropped their expectations on the full range of indicators including new business inflows, revenues and profits, employment growth, capital expenditure and R&D investment; in the manufacturing sector, cost pressures are expected to rise sharply. But while the numbers may be down across the board, they are still mostly positive, indicating an overall optimism within the Russian manufacturing and services sectors.
“Russia remains optimistic overall, but clearly manufacturers and services organizations are starting to feel the pressure of increasing raw material and energy prices, and rising inflation” noted Andrew Cranston. “The continued uncertainty in Europe will also put some pressure on some of Russia’s main export markets which is sowing uncertainty into the Russian markets.”
The survey seems to indicate that Russian manufacturers and service organizations are quickly losing confidence in their business prospects. With only modest growth expected in employment numbers and similarly low expectations for capital expenditure and R&D, it seems Russian businesspeople are focused on securing the short-term rather than expanding for the long-term.
About the survey
Pulse – KPMG’s Global Business Outlook Survey for worldwide manufacturing and services – is produced by Markit Economics on behalf of KPMG in the UK and is based on a survey of around 11,000 manufacturers and service providers that are asked to give their thoughts on future business conditions. The reports are produced on a tri-annual basis, with data collected in February, June and October. The latest survey was conducted between October 12 and 27.
The countries covered by the survey are the US, Japan, Germany, the UK, France, Italy, Spain, Ireland, Austria*, the Netherlands*, Greece*, the Czech Republic*, Poland*, Brazil, Russia, India and China.
Interest in the use of economic surveys for predicting turning points in economic cycles is ever increasing and KPMG’s Pulse survey uses an identical methodology across all nations covered. It gives a unique perspective on future business conditions from Global manufacturers and service providers.
The methodology of KPMG’s Pulse survey is identical in all countries that Markit Economics operates. This methodology seeks to ensure harmonization of data, and is designed to allow direct comparisons of business expectations across different countries. This provides a significant advantage for economic surveillance around the globe and for monitoring the evolution of the manufacturing and services economies by governments and the wider business community.
Data collection is undertaken via the completion of questionnaires three times a year at four-month intervals. A combination of phone, fax, website and email are used, with respondents allowed to select which mechanism they prefer to use.
KPMG’s Pulse survey uses net balances to indicate the degree of future optimism or pessimism for each of the survey variables. These net balances vary between -100 and 100, with a value of 0.0 signaling a neutral outlook for the coming twelve months. Values above 0.0 indicate optimism among companies regarding the outlook for the coming twelve months while values below 0.0 indicate pessimism. The net balance figure is calculated by deducting the percentage number of survey respondents expecting a deterioration/decrease in a variable over the next twelve months from the percentage number of survey respondents expecting an improvement/increase.
Questionnaires are sent to a representative panel of around 11,000 manufacturing and services companies spread across the global economy in the countries mentioned above. Companies are carefully selected to help ensure that the survey panel accurately reflects the true structure of each economy in terms of sectoral contribution to GDP, regional distribution and company size. This panel forms the basis for the Pulse survey. The current report is based on responses from around 6,200 firms.