ACCA survey shows high inflation and low investment hampers recovery

South Asian finance professionals more pessimistic amid disappearing opportunities

Rising inflation and flat investment have kept the world’s economic recovery stuck in reverse, the latest Global Economic Conditions survey from ACCA (the Association of Chartered Certified Accountants) has shown.

Of the 2,186 ACCA members surveyed between 16 May and 6 June 2011, only 26% reported increased confidence, down from 28% three months ago, with 57% saying that economic conditions are either deteriorating or stagnating, up from 51% only three months ago.

While the rocketing inflation of the first quarter of 2011 was not repeated in the second three months, a greater proportion of those surveyed, 54% – up from 51% in the last quarter – reported an increase in operating costs. This is double the number of respondents who mentioned inflation two years ago.

Rising costs not just confined to fastest-growing economies

The survey shows that rising costs are not just confined to the fastest-growing economies.

While best performing markets Malaysia and Pakistan are leading the inflation league table, rising costs were also cited by 45% of respondents in Western Europe, which has been affected by the continent’s debt crisis, still sits at the bottom of the ranking in terms of business confidence and economic optimism.

The survey shows that businesses are becoming increasingly unable to respond to the inflationary challenge through cost-cutting.

Around 30% of respondents expect their governments to get spending decisions right in the medium-term, but 16.5% expect dangerous levels of over- or under-spending and this group has been growing every quarter since late 2009.

Access to finance has been tightening globally for the past six months, and this appears to be the case for both growth capital and short-term liquidity. This, combined with rising costs, now appears to be leading to an increase in the number of respondents who fear that customers (31%) or suppliers (15%) might go out of business, as well as those reporting problems with late payment (31%).

Despite these worrying trends, confidence figures among finance professionals have not yet dipped to a situation where they believe there will be a renewed downturn.

Professionals in Africa and the Asia-Pacific region consistently more optimistic

For the past two years, professionals in Africa and the Asia-Pacific region have been consistently more optimistic than their colleagues elsewhere about the state of the economic recovery, and this resulted in high levels of confidence in their own organisations.

In this survey, however, confidence is surprisingly low in both regions, with Asia-Pacific recording a net loss of confidence for the first time in two years. Hong Kong and Malaysia seem to be particularly affected, while Singapore has bucked the trend by recording further confidence gains.

While the gloom in the Far East reflects the fallout from the disaster in Japan, flagging confidence in Africa is mostly a lagged effect of the slowdown elsewhere. The GECS results show that the impact of a drop in activity in OECD countries has for the last few months been trickling down the supply chain, first to the Asia-Pacific region and then to Africa.

However, unlike the previous quarter, most of the pressure on access to finance appears to be concentrated on Asia-Pacific and the Middle East.

Under these challenging conditions, profitable value-added opportunities of most types have become scarcer and the investment environment has deteriorated slightly, especially in terms of financing and business support. Still, investment itself has remained flat and the outlook for employment and investment in staff has even improved slightly. This is almost certainly related to the slow recovery in new orders.

Loss of momentum in Asia and Africa has become particularly pronounced

Report author Manos Schizas, senior policy adviser with ACCA, said: “There are a number of concerns in the latest report, including that the loss of momentum in Asia and Africa has become particularly pronounced in the last few months. The limits of austerity are also being explored in Western Europe and a renewed tightening of credit and cashflow conditions could be on the cards, even as new orders and employment are beginning to recover.

“If these new trends – coupled with high inflation and low investment – persist we would expect to see further instability in the near future, which will present more challenges for all sectors professional accountants whether they work in practice or industry in the second half of 2011.”

South Asia remains pessimistic amidst poor macroeconomics and disappearing opportunities

Finance professionals in South Asia recorded an overall loss of confidence in the last quarter, with only one in four (25%) respondents saying they were more optimistic about the prospects of their organisations than they had been three months earlier. Half of the region’s respondents believe that global economic conditions are deteriorating or stagnating.

However, even this relatively poor performance represents an improvement over the last quarter. In fact, for many months now respondents in South Asia have been surpassed only by their colleagues in Western Europe for economic pessimism.

Some of the reasons are relatively obvious. First, the region is heavily affected by rising inflation; Pakistan in particular emerged as the worst-affected among ACCA’s major markets, with 78% of respondents citing increased operating costs. Second, fiscal sustainability remains a problem, with 35% of respondents in the region (up marginally from 34%) expecting dangerous deviations from what they saw as the correct level of government spending in the medium term (five years).

Worrying changes to the fundamentals

Then there are worrying changes to the fundamentals: business failures multiplied significantly in the last three months, and investment appears to have fallen substantially, even though business incomes have not changed substantially and access to finance appears to have improved marginally.

Volatile foreign exchange rates and inflation also posed challenges for a growing number of firms but they cannot account for the continuing loss of confidence. Rather, the problem appears to be that respondents see ever fewer opportunities for their businesses going forward, especially of the more value-added kind. Opportunities to invest in quality and customer insight, for instance, were much less frequently cited than even three months ago.

For ACCA’s full report, log on to http://www2.accaglobal.com/pubs/general/activities/library/economy/tech-ms-gec10.pdf.