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 certainly on a surer footing, driven by improvements in key developed markets such as Japan, the EU and the US. The IMF forecasts global growth of 3.6% this year, up from 3.0% in 2013; and the WTO recently upgraded its world trade growth projections to 4.7%, up from 2.1% last year. Both organisations cite improvements in developed markets for the pick-up in activity as the global economy enjoys its first period of prolonged stability since the financial crisis. The IBR reveals that ‘economic uncertainty’ declined as a growth constraint over the past three months. Stock markets around the world are booming – the S&P 500 has posted seven record closes this year alone.
However, serious challenges to the global economy remain, providing the counterbalance to this argument. The recovery from the financial crisis has been very slow by historical standards. Unemployment rates in the developed world have been slow to come down, dampening consumer spending and keeping social security transfers elevated. The situation in the eurozone has improved but debt levels remain unsustainably high. And now many developing economies are struggling as the US unwinds its massive quantitative easing programme, seeing their currencies plunge and inflationary pressures build. Add to this the ongoing Ukraine crisis (which erupted after we conducted the IBR interviews) and business confidence levels are 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.