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Stuck in the doldrums

Per Lundahl Per Lundahl

Economic slowdown hampering business growth efforts

 

The Q3-2012 IBR results we released yesterday made pretty grim reading: Globally, business optimism dropped for the year ahead from net 23% in Q2 to net 8%, well below the 2010-12 average.

It is not hard to see why: the eurozone crisis is still rumbling on with even the IMF now admitting that austerity measures are choking growth prospects; the US economy remains paralysed ahead of the presidential elections and the looming ‘fiscal cliff’ which could wipe off 4.6% from GDP, enough to plunge the economy back into recession; and last Thursday, China posted growth of 7.4%, a seventh consecutive quarterly decline.

Taken together, China, the EU and the US account for 57% of global output. Slower growth in just one of these economies will have knock-on effects around the world. Slower growth in all three at the same time is a major headache for business leaders.

The key issue for businesses is risk. Lower confidence in the macroeconomic environment means business leaders delay decisions on investment and hiring. This in turn leads to slower growth, leading to lower confidence. A classic vicious cycle.

The IBR numbers bear this out. Despite sitting on huge reserves, 80% of businesses globally plan to maintain or even boost the level of cash they are holding. Meanwhile, expectations for increasing revenues, profits employment and investment in plant and machinery over the next 12 months all fell by at least 5% in Q3.

But the cycle can be broken and we have two suggestions as to how.

Firstly to governments, especially those in the developed world: The economic uncertainty is damaging business growth prospects. You have a huge responsibility to provide leadership, to work together, whether that be cross-border or cross-party, to overcome the debt problems and create the right environment to encourage business leaders to invest for the future.

And secondly to business leaders: Reason might tell you to stuff your cash under the mattress and wait for a sustained recovery. But listen to your instinct. Interest rates are low and talent is plentiful, this could be the perfect time to invest in your people and operations, helping you get ahead of the competition when the global economy is on a surer footing.

Paul Raleigh is global leader of growth at Grant Thornton.