Grant Thornton’s International Business Report (IBR) finds that global optimism in the economic outlook has reached an all-time high at net 61% [i] in Q1 2018, underpinned by a broad-based economic recovery. With economic fundamentals at their strongest since the financial crisis, the message to businesses is to act now to identify opportunities for investment.
The breadth of business optimism around the world is evident in the IBR’s findings. Some of the most striking increases can be observed in North America (up 7pp in Q1 from Q4 2017) and the EU (up 12pp from Q4 2017).
North American uptick is principally driven by the United States, with confidence among US firms increasing by 10pp to reach an all-time high over the last decade of net 89%. As the world’s largest economy, the new level of optimism here is a significant contributor to the global picture. There are two key factors underpinning this rise. Firstly, economic uncertainty in the US is at an all-time low (7%). Secondly, a net 42% of businesses are confident that they will be able to raise selling prices over the next 12 months, the highest number in three years. Low levels of economic uncertainty are shared across the North American region, reaching an all-time low of 10%.
All time low
Highest since Q2 2015
In Europe, French business optimism is at new heights (net 75%) – underscored by renewed confidence in the country’s administration – and the UK is at its most optimistic (net 31%) since voting to leave the EU. Optimism is broad-based, with southern Europe starting to catch up with its western counterparts. Italy and Spain report increased optimism, rising by 6pp and 17pp respectively. In Greece, business optimism sits in positive territory (net 6%) for the first time in three years. The IBR reports the highest ever revenue expectations in the EU, rising to 57%. Expectations for raising selling prices in the EU are also at their highest level since Q4 2010, primarily driven by increases in the UK, France, Germany and Italy. Optimism in the region is underpinned by broad-based recovery and growth over consecutive quarters, with GDP rising steadily from 2013 to the present. [ii]
Net optimism increase in Spain
Overall, African optimism levels show a staggering increase from 42% to 82%. The IBR finds record levels of optimism in Nigeria (net 84%) in Q1, with real GDP showing growth for the third consecutive quarter. The IBR also observes a turnaround in South Africa owing to political and economic reform, with optimism rising to net 78% from net -18% in Q4 2017. Profitability and revenue expectations in South Africa are at their highest in three years, at 54% and 65% respectively.
Across South East Asia, optimism has risen to net 61%, the highest figure in seven years. Malaysian business confidence is up from net 6% to net 28% – the highest since Q3 2014. In contrast, elsewhere in Asia, China (-13pp) and Japan (-11pp) record dips in optimism. Dampened export expectations combined with tough trade rhetoric with the US are likely contributing factors.
Latin American optimism is down 10pp, to net 25%. High levels of national debt and a weak bounce back from the recent recession in Brazil are likely contributors to decreased confidence. However, despite a dip in optimism in both Latin America and Asia Pacific, confidence levels still compare favourably to recent years.
Such widespread business optimism is a welcome indication that the global economic recovery is finally broad- based. The IBR observes an inclusive spell of economic growth and expansion across markets, with economic fundamentals the strongest they have been since the financial crisis. GDP across the key economies of North America, Europe and Asia Pacific shows uniform acceleration and above average growth since Q2 2017, and broad-based expansion is expected to continue in 2018. [iii]
The IBR reveals that despite high levels of optimism and broad-based economic growth, investment in infrastructure, capital goods and research is not increasing in step. Global plans to invest more in plant and machinery are down 2pp to net 34% in Q1 2018, while plans to increase R&D spend are down 3pp to 22%. Investment in new buildings remains flat for the third consecutive quarter.
Southern Europe is an exception, with investment plans increasing slightly in line with economic turnaround. Here, expectations for investment in new buildings, plant and machinery, and research and development (R&D) are up on the previous quarter by 5pp, 3pp and 1pp respectively.
Based on these observations, economic predictions are positive for the short to medium term, creating a window of opportunity for businesses to invest. Interest rates remain low but are projected to rise over the next two years, meaning the time is right for businesses is to borrow if they’re thinking of investing in 2019 or 2020. They will do well to identify opportunities to invest at the peak of this cycle to secure their future success.
For further information please contact: Andrew Brosnan, insight and thought leadership manager, Grant Thornton.