I must admit that the optimism of business leaders around the world evident in our quarterly International Business Report (IBR) economic update was almost as surprising as it was pleasing. Confidence is up at levels we have not seen since 2007, before the financial crisis and subsequent ‘Great Recession’. The question I have been wrestling with is whether this is a sign that the recovery is moving onto a more sustainable footing, or whether we are seeing an ‘optimism bubble’.
The (perhaps unsatisfactory) conclusion I have reached through looking at the data and comparing this to what clients around the world are telling us is, a little bit of both.
The global economy is on firmer ground, with key developed markets like Japan, the EU, and the US driving growth. The IMF forecasts 3.6% global growth this year, up from 3.0% in 2013, and the WTO raised world trade growth projections to 4.7%, from 2.1% last year. Both organisations cite improvements in developed markets. The IBR shows a decline in ‘economic uncertainty’ as a growth constraint. Stock markets are booming, with the S&P 500 posting seven record closes this year alone.
Serious challenges to the global economy persist, balancing the optimism around recovery. The post-crisis recovery has been slow by historical standards, with high unemployment in developed nations dampening consumer spending and keeping social security transfers elevated. In the eurozone, debt levels remain unsustainably high, despite improvements. Many developing economies are struggling as the US unwinds its massive quantitative easing programme, leading to currency plunges and inflationary pressures. The ongoing Ukraine crisis (which occurred after our IBR interviews) further complicates matters, making current business confidence levels even more surprising.
Perhaps the clearest indication that we are seeing a certain level of exuberance in the market is that business investment plans have not moved in time with the optimism surge over the past three months. Globally, the proportion of business leaders planning to increase spending remains some ten percentage points lower compared with 2007 levels. This is important, as Christine Lagarde said recently: global growth prospects depend in large part on businesses and governments increasing investment if the recovery is to become truly sustainable.
The good news of course is that the link between optimism and growth is clear: business leaders who are more confident in the economic outlook are more likely to take on risk; invest in that piece of machinery; make that acquisition; develop that new product; hire that new person.
The confidence is there. Now let’s see the investment.