Today our guest blogger is Emmanouil Schizas. Emmanouil is a policy adviser with the SME Affairs Unit at ACCA. His work focuses on the impact of regulation on small firms, SMEs' access to finance, and the public procurement market, as well as enterprise skills and training.
Emmanouil studied Economics and Human Resource Management in Athens, Greece, before moving to London to study Accounting and Finance. After graduating, he worked for two years as a researcher for the UK's Financial Services Skills Council, before joining ACCA in 2008.
When Baroness Vadera, the UK’s Minister for Competitiveness and Small Business, said earlier this year that she could see “a few green shoots” of economic recovery, she was savaged by commentators for being insensitive and out of touch. But with the coming of spring, more and more cautious optimists are sprouting up – and being told off – around the world (1, 2, 3).
Even though there is still no consensus on the timing of a global economic recovery, most commentators agree that the return of confidence among businesses and consumers is a necessary condition. In the words of one ACCA member:
“At some point Chicken-Licken will realise that the sky hasn't in fact fallen on her head, and confidence will return.”
But where does confidence come from? A recent survey of ACCA members has given us a glimpse into how finance professionals form their expectations of the future, both for their own organisations and for the global economy.
Between 20 February and 14 March, 805 of our members from more than 80 countries responded to ACCA’s first Global Economic Conditions Survey. I will not discuss here what respondents told us about the state of the global economy – a summary of these findings is now available on the Global Economy Microsite. Instead, I’d like to share with you what the survey told us about how respondents came to these conclusions.
ACCOUNTING FOR CONFIDENCE
The survey findings suggest that professionals’ confidence in their own organisations is driven mostly by microeconomic factors and that businesses can be successful despite an economic downturn.
The survey examined a wide range of negative impacts attributable to the economic downturn, but only a few were consistent with significantly lower levels of confidence among finance professionals. Staff cuts and hiring freezes correlated most strongly with loss of confidence, followed by decreased income and concerns about late payment. Difficulties securing finance and concerns about customers going out of business also had significant but less extensive effects. Respondents who were worried about the survival of key suppliers were actually more confident, possibly because they expected the reduced bargaining power of their suppliers to lead to savings for their own organisations.
Those businesses that were able to take advantage of shifts in demand (for instance towards lower-priced goods) made the greatest gains in confidence, while opportunities to promote high quality standards also materially improved confidence.
Organisations which were small and undiversified regionally, were thought by respondents working in them to be more vulnerable. This effect was cancelled out when the specific impacts of the downturn were taken into account, suggesting that loss of confidence in these businesses is driven mostly by objective factors.
Once all of the above were taken into account, there were no significant sector or country effects on confidence. The predicted duration of the downturn, however, did influence confidence in a complex fashion.
Respondents predicting a very quick recovery (1 year or less) reported higher levels of confidence regardless of whether the particular effects of the downturn were taken into account. On the other hand, those predicting a very slow recovery (3 years or more) were also more confident, but only once the effects of the downturn were taken into account. This means that some of the pessimists out there are deriving confidence from the fact that they’re prepared for the worst, while some of the optimists may simply be failing to read the writing on the wall.
Finally, a lack of experience, and possibly fear for one’s own job prospects, can bias the perceptions of professionals. Newly qualified accountants had less confidence in the prospects of their organisations than more experienced staff. The effect of added experience is positive but appears to peak within the first 4 years.
FORECASTING THE RECOVERY
The survey asked respondents to forecast how soon the global economy would recover and assess how far along the economic cycle we currently are – whether things are still getting worse, whether the downturn has reached a bottom, or whether things have finally started to improve.
Respondents’ ratings of government interventions were one of the most significant determinants of their forecasts for the global economy. For the average respondent, moving between the highest and lowest possible ratings of government would change the forecast timing of the recovery by about 2 to 9 months. Professionals who rated their governments’ efforts highly were also more likely to think that the worst of the downturn is behind us. This second effect was milder, possibly because governments are seen as having more control over the duration than the shape of a downturn.
We found some strong sector effects on these forecasts, all of them towards the more pessimistic end of the forecast range. Respondents in construction expected the downturn to last the longest, followed by those in financial services and pharmaceuticals.
Additionally, finance professionals in the public sector thought the economic cycle had slightly further left to go than their colleagues in the private sector. This is not surprising. If the inevitable government spending cuts are likely to dampen medium-term economic growth, these professionals are very well placed to anticipate this effect.
Respondents in non-OECD countries generally considered the global economy to be closer to recovery than those in OECD countries. In addition to the overall OECD membership effect, many individual country effects emerged and can be ranked. For instance, respondents from the US and Canada were the most upbeat in the OECD group, whereas Botswana, Jamaica and Zambia led the even more upbeat non-OECD countries.
In addition to assessments of the economic cycle, forecasts of the timing of the recovery also varied by country. Respondents in some non-OECD countries, especially Ghana, Jamaica and Kenya, expected a substantially shorter downturn.
The respondents’ role biased forecasts of the length of the economic downturn. Junior managers are the most optimistic, and senior managers the least. Retirees are the most pessimistic. Note that length of service as a qualified accountant did not, as such, have any effect on forecasts: professionals were simply more optimistic if they felt they had most of their working life still ahead of them.
Finally, respondents were biased by losses of confidence in the prospects of their own organisations. The least confident professionals thought the cycle had furthest to go yet. This was only a weak effect and it did not obtain at all for respondents experiencing milder losses of confidence or confidence gains. However, it does point to a dangerous feedback effect between implied economic forecasts and business confidence which is typical of an economic downturn.
WATCH THIS SPACE
Some of the relationships uncovered here will no doubt change as the global economy recovers. In fact, a great deal has already transpired since mid-March, from the rollout of stimulus packages in the US and elsewhere, to the G20 summit and the first solid proposals for financial services reform.
ACCA will monitor these changes and assess their effects through a series of quarterly surveys. We’ll be keeping an eye out for emerging trends across sectors and regions, using the resulting insights to inform business and influence government around the world. You can follow our regular updates on all of these matters on the ACCA Global Economy micro-site: