The news isn’t surprising considering that almost half of the firms surveyed admitted they were more pessimistic about their future prospects than they were three months earlier. What has triggered this outlook of gloom and doom? Well, for starters, commodity prices have been falling. From oil to wheat, a fall in prices is most definitely not great news for those countries which are heavily reliant on them.
Many parts of the Caribbean, most notably Trinidad & Tobago, have suffered because of this fall in commodity prices. For this commodity producing nation, rich in petroleum, cocoa and citrus fruits to name a few, falling prices mean a loss of export earnings, jobs under threat and a currency crisis because it leads to depreciation of the currency value, which is inherently underpinned by the worth of its commodity exports.
The global back story so far has been that the revenues of commodity firms have collapsed since mid-2014 but the general weak price environment has also put downward pressure on a much broader range of businesses. Last year, global trade fell at its fastest rate since 2009 in US dollar terms, and, putting that year aside, it experienced the sharpest decline in two decades. Global trade volumes increased, but only by 2.5% - slower than in the previous two years – suggesting that firms have been hurt by weak demand as well as lower prices.
Large firms are more likely to trade across borders. Many of the large businesses surveyed are reporting declining incomes and the negative effects of exchange-rate movements more than small and medium-sized enterprises (SMEs). Additionally, more of these firms are also cutting capital expenditure, with every region except North America seeing a jump in this activity.
So it’s no wonder that cuts in employment are on the horizon. On top of this, wages are rising rapidly in many parts of the world. Many businesses are finding it increasing difficult to cope with this as their revenues come under increasing pressure. Only 12% of businesses in the survey saw an opportunity to increase their orders as a result of changes in the global economy last quarter.
With their revenue under pressure, business confidence is very low. Notably, business confidence in China has fallen to its lowest level since the quarterly survey began. With the size and influence of China, it is little wonder that the shock waves have been felt across the world.
Additionally, costs for firms will have risen due to the sharp drop experienced by many currencies against the dollar, making imports more expensive and raising the value of dollar-denominated debts. Again, this shows that many firms, especially in emerging-market economies are very pessimistic about their prospects.
But there are some rays of light shining through the dark clouds in the report. Caribbean economies - such as Barbados, Jamaica and the Cayman Islands, can be helped with the pick-up in tourism numbers and demand for financial services from the US. Commodity prices are also less important to these markets.
In addition, many firms globally are combating these difficult conditions by innovation. This can be seen in the growing number of businesses citing innovation as an opportunity in the report: 40% in Q1 2016, compared with 36% of firms in Q4 2015 and 33% in Q3 2015. Indeed, in a difficult global environment, firms are under as much pressure as ever – if not more – to increase efficiency through innovation so that they’re investing in those ideas which are most likely to deliver the best returns.
One thing for certain is that an economic turnaround will not happen overnight. As soon as a firm’s income begins to drop and the business stops hiring, getting their confidence back up can be very difficult. But it is vital for an economy and it is up to policymakers to demonstrate clear ideas to boost business confidence and avoid further downward drift.
Accountants are crucial to steering businesses through these difficulties; after all accounting is the backbone of the business and financial world. Through contributing to discussions about economic growth, managing finances and promoting good financial management, they enable Chief Financial Officers (CFOs) to successfully navigate businesses as they face tough times ahead and take advantage of challenging circumstances.
The Global Economic Conditions Survey (GECS) is the largest regular economic survey of accountants with more than 1,200 responses from ACCA and IMA members around the world, including more than 100 CFOs. Based on this information, ACCA is able to shed light on the global economy using first-hand insights into the fortunes of companies around the world.