Business Optimism Softens Despite Rising Revenues

The global economic cycle may have peaked as businesses leaders globally are less optimistic about the economic outlook despite continuing rises in expected revenues, said Grant Thornton recently when releasing its latest International Business Report (IBR).

The IBR indicates that global business optimism in Q2 2018 was a net 54%, a drop from the record high net 61% figure reported in Q1 2018.

Among the world’s two biggest economies, there was a divergence between the US, where optimism dropped 11pp to net 78%, and China, where it increased 14pp to net 79%, the firm said.

Some of the largest drops in optimism were seen in the EU, where optimism for the region fell from net 60% to net 46%, according to the IBR.

Despite the backdrop of looming US interest rate rises, ongoing trade disputes and the end of quantitative easing in the EU, businesses are not taking steps to structurally invest to counter the risks the next stage of the economic cycle present, Grant Thornton noted.

According to the IBR, Investment indications have held stubbornly flat despite rising revenues: -- research and development is steady at 22%; -- investment in technology increased by 1pp to 48%; -- investment in plant and machinery increased 4pp; -- investing in new buildings experienced a steady global increase of 2pp; and -- expectations for increased investment in all these areas have remained the same over the past two years.

“If we are entering the end of a global cycle, businesses need to rapidly increase their investments and put their expected increased revenues to work to fix the roof while the sun is shining," said Francesca Lagerberg, Global Leader Network Development at Grant Thornton. “The need to invest is highlighted by the fact that access to skilled workers is seen as the biggest constraint to growth by 40% of businesses globally."

Asia Pacific businesses worry about exchange rates In addition, emerging markets are increasingly wary of interest rate fluctuations brought by US’s interest rate hikes.

In emerging Asia Pacific, 35% cite it as a constraint, up 5pp from the previous quarter, according to the IBR. This is driven by Malaysia (up 18pp to 48%), the Philippines (up 8pp 42%) and Thailand (up 2pp to 28%), the report adds.

Businesses confident about next year However, businesses remain confident about their own performances over the next year, with many having a positive outlook for revenues, said Grant Thornton. Globally, a net 59% of businesses expect an increase in revenue over the next 12 months. In the US, revenue expectations increased to net 76% from net 61% and in China they rose to net 62%, the report reveals.