KPMG’s Pulse survey shows a drop in optimism in most markets coupled with an expected slowdown in employment growth.
Business confidence suffered a remarkable setback in the second quarter of 2011. According to the summer edition of KPMG International’s Global Business Outlook Survey, business sentiment dropped globally between February and June, with some of the biggest losses felt in the EU and BRIC markets. In fact, this survey finds that business confidence in many markets is now the weakest it has been since 2009.
Commenting on the latest survey findings, Andrew Cranston, Senior partner, KPMG in Russia and CIS, said: “Clearly, signs of a renewed slowdown in the world economy are dragging on business confidence in many markets. When viewed against the backdrop of sovereign debt concerns and potential defaults, the ongoing challenges in Japan and continued political upheaval in the Middle East, it is not surprising that confidence is lower in most markets across both the manufacturing and services sectors.”
Much of the global erosion in confidence stems from significant retreats in the EU and BRIC markets. In the EU, growing concerns over the size and scope of sovereign debts and defaults have dampened spirits. This is particularly the case in the ‘core’ Eurozone economies of Germany and France where businesses fret over the health of the Euro as periphery countries come under pressure. Not surprisingly, businesses in Greece continue to anticipate an outright contraction in activity, as they have since the start of 2009.
“There continues to be a fair amount of uncertainty with regards to the EU’s sovereign debt concerns. Businesses are unsure what impact austerity measures and economic bailouts will have on the troubled economies in the Eurozone periphery and few are convinced that the economic contagion will not spread to other fragile economies,” added Andrew.
As a result, many western businesses are looking to the BRIC countries to drive global growth. But businesses operating in these markets are also suffering from dampened confidence, reflecting a weaker global trade environment and tighter macroeconomic policy across a number of these markets. In fact some of the largest drops were seen in the Chinese manufacturing sector and Indian services sector.
More and more, we must recognize that our national economy is now closely intertwined with not only our trading partners, but also the larger global market,” said Andrew Cranston. “As we have seen over the past few months, debt issues in one country – half a world away – can have a severe impact on the confidence of businesses around the world and here at home.”
In contrast, US companies were enjoying the highest optimism levels globally despite wider concerns over the pace of growth in the US economy. However, this survey does not take into account the recent debt debate in the US, which – while temporarily resolved – has resulted in heightened concerns about the health of the US economy and the implications of a downgraded credit rating from Standard and Poor’s. So while sentiment in the US service sector slipped since February, at the time of this survey, it still remained comfortably above the global average, while optimism in manufacturing had improved to the highest level in a year.
However, worldwide employment growth is expected to slow over the next twelve months as companies reanalyze their needs against the anticipated weaker expansion of activity. The slowdown is set to be broad-based, with Japanese and EU (particularly Eurozone) businesses indicating the weakest labor market prospects.
As a result of dampened confidence and lower employment expectations, it is not surprising that surveyed companies indicated lower expectations for investment during the coming year. Firms in the BRIC area continue to anticipate the strongest growth of investment, but developed economies are set to see generally muted increases. This is particularly the case in the manufacturing sector, where spending on both capital and R&D is forecast to rise at a slower pace than was indicated in February.
“The world is experiencing a period of great economic upheaval and uncertainty that is creating massive complexity for businesses in almost every market,” added Andrew Cranston. With new doubts emerging about the strength of the economic recovery in the US and mounting debt and default concerns in the EU, there is every chance that business confidence is in for a bumpy ride over the next few quarters.”