Economic recovery takes firm hold worldwide, claims KPMG survey
Optimism reported around business activity, revenue and profits but prospects for increased employment remain muted.
Further evidence of the recovery taking hold in many major economies around the world comes courtesy of the latest KPMG Global Business Outlook survey, recently released. For the third consecutive quarter, the survey shows healthy optimism around key measures such as business activity, revenues and profits.
The survey, compiled by research firm Markit on behalf of KPMG International, works on a net balance basis, with the percentage of respondents feeling more pessimistic about their company’s outlook deducted from the percentage feeling more optimistic about the conditions over the next 12 months. A result of 0.0 would indicate a neutral outlook for the coming twelve months.
The net balance for global business activity in manufacturing stands at +50.9, up from +42.9 last quarter, while the equivalent figure in the services sector stands at +44, down slightly from +46.5 last time, but still strongly optimistic. This suggests a firm majority of respondents believe their businesses will be getting busier in the coming 12 months.
The outlook for improved business revenues is similarly healthy with a net balance of +42.5 in manufacturing, up from +37.4, and +37.9 in services, flattening out a touch from +40.7 last time. Optimism around profits is also holding up robustly at +35.3 in manufacturing, up from +32.1 and at +35.5 in services, from +36.2 last time.
Digging deeper into some of the key indicators, the percentage of respondents who predict no change in the coming year, and who thus have no impact on the net balance, stand around 20-25 percent in manufacturing and around 30 percent in services. Of those who have a firm view one way or the other, optimists now outnumber the pessimists by as much as four or five to one.
Commenting on the results, Alan Buckle, Global Head of Advisory at KPMG, said: “What we are seeing here is evidence of a robust recovery across numerous key markets which is set to run through until at least the end of the first quarter of 2011. Admittedly, we are coming at this from a pretty low base in terms of the nadir which the survey numbers hit in late 2008. However, the extent to which the optimists now outweigh the pessimists cannot be ignored. The results from the BRIC countries (Brazil, Russia, India, China) put the other countries, with the exception of the US, somewhat in the shade but even if you took out the BRIC numbers, you would still be looking at some respectably healthy confidence levels elsewhere.”
“With a few exceptions, the recession ended last year and the survey points to continued growth over the next twelve months. However, there are still concerns: In particular, over the course of the year, we need to see the recovery feed into employment and to kick-start investment spending - where intentions currently lag somewhat - before we can really sleep soundly.”
The upward trend in optimism is now evident across the past three Outlook surveys. Confidence around business activity in the services sector hit an all-time low in October 2008 at -2.9 in Europe, indicating that the pessimists were in the majority and 33.8 in the BRIC countries. As for manufacturing, that dropped as low as -10.2 in Europe and +3.6 in BRIC in January 2009. What these record low figures do demonstrate, however, is how the BRIC countries were never as badly affected as their European counterparts and were able to start their recovery from a stronger base.
One area in which global confidence does remain somewhat muted is regarding employment prospects. This is one indicator on which the neutrals – who neither expect to increase or reduce headcount – hold sway, accounting for 53 percent and 60 percent of manufacturing and services respondents respectively. Amongst those who do feel likely to act one way or the other, net balances of just +17.1 (services) and +14.6 (manufacturing) are indicative of how businesses appear to be waiting for the recovery to solidify further before getting back on the recruitment trail.
Alan Buckle concluded: “Looking across the results, I feel that there is a three-tiered recovery in play here. In the top tier are the BRIC countries: full of confidence and worried only by inflation or issues from outside of their own borders which they have no control over. In the second tier are the more cautious optimists, including the US and the stronger European countries. The US may be some way out in front in terms of actual net balances but my feeling is that they share a fear with the Europeans over how sustainable the recovery is and what might happen when stimulus packages expire or are withdrawn. In the third tier are countries like Greece, whose business confidence is lacking for obvious reasons. Countries in this tier exhibit survey results which lag the others by some way, serving as a salutary lesson to the others that nothing can be taken for granted at this most delicate stage of recovery.”
Commenting specifically on conditions in South Africa, which was not included in the KPMG Global Business Outlook Survey, Gavin Maile, Africa Industry Leader for Industrial, Automotive, Pharmaceutical and Construction at KPMG, said “general business conditions continued to recover during the first quarter of 2010. According to the results of the Bureau for Economic Research Manufacturing Survey for the first quarter of 2010, the net majority of respondents reporting a deterioration in conditions has more than halved from 42% to 17% relative to a year ago. This reflects that the majority of manufacturing companies in SA are more positive than a year ago, but we have not yet seen a growth in employment.” A noticeable improvement in conditions and confidence was not broad-based. Instead, it was highly concentrated in the transport equipment and basic metals sub-sectors, according to the Bureau of Economic Research (BER).
The RMB/BER Business Confidence Index (BCI) jumped by a further 15 points to a level of 43 during the first quarter of 2010. According to the RMB/BER BCI, this is the single biggest increase between two consecutive quarters in 16 years. Although the first quarter improvement in business confidence is impressive, the majority of respondents are still pessimistic in their outlook.
“The next quarter will provide evidence as to whether this improvement in confidence can be sustained and rise above 50. Possible influencing factors on this could be fluctuations in the exchange rate and the impact of the 2010 FIFA World Cup. Vehicle sales, which are normally a leading indicator, have been surprisingly strong for the first four months of 2010, and are expected to continue at this level, albeit off a very low base. Total vehicle market year-to-date growth is up 22% from last year’s figures. We also need to ask longer term questions about where manufacturing will figure in the government’s efforts to rebalance the economy, and reduce our dependency on the services sector. The Industrial Policy Action Plan 2 (IPAP2) has many relevant cornerstones which would support increasing manufacturing’s contribution to the overall GDP.
Improvements have been made in many manufacturing sectors, however we will need to see this sustained and more broad-based into the remainder of 2010. The performance of the JSE implies that the market believes this will be sustained,” concludes Maile.
