Asia Pacific suffers sharpest drop in business confidence globally

Profitable opportunities have become scarce.

The sharpest drop in business confidence anywhere in the world in the second quarter of 2015 was experienced in the Asia Pacific region, the latest global survey of finance professionals has revealed.

According to a release from the Association of Chartered Certified Accountants and IMA (the Institute of Management Accountants (ACCA), businesses in the region were negatively impacted by a drop in demand as Chinese growth continued to slow, according to finance professionals responding to the Global Economic Conditions Survey organised by ACCA.

Leong Soo Yee, Director (Asia Pacific) of ACCA said, “Slowing demand from China for construction materials has not only hit commodity producers in the region, such as Australia, Indonesia and Malaysia, but also the services-heavy economies of Singapore and some Australian cities, which have grown up around the wealth generated by the commodities trade.”

Following weak economic data from China in the first quarter, nearly two thirds of firms in the region reported that there were now fewer profitable opportunities to exploit.

The outlook in the medium term is less gloomy than the survey suggests. China’s central and provincial governments are willing to take drastic measures to ensure that the economy does not experience a hard landing, and stimulus measures from earlier in the year have already resulted in strong fixed asset investment growth during the second quarter.

Here’s more from ACCA:

China’s regional trading partners, for their part, have taken measures to blunt the effect of a Chinese slowdown. Australia’s central bank cut rates in February and again in May, sinking the value of the dollar and thereby helping exports of items still in high demand from China, such as meat and wine.

ASEAN’s emerging economies, such as Malaysia and the Philippines, have become more balanced in recent years with the rise of domestic middle classes helping to drive growth. Although reduced oil revenues will dent Malaysia’s prospects, the manufacturing sector—which contributes around a quarter of GDP—will benefit from cheaper oil, while the tourism industry stands to benefit from the recovery in advanced Western economies and ongoing growth in Chinese visitors to South-east Asia.

Meanwhile, the global economy faces a period of volatility and major readjustments, according to the survey.

The second quarter of 2015 saw an abortive rise in oil prices, several expected and unexpected rate cuts by central banks, a rebound in Western consumer sentiment and a stock market crash in China.

These events led to business confidence levelling off in the second quarter of 2015 following six months of improvement.

The slowing in confidence can be traced to the world’s largest economies: many businesses in the US were affected by severe winter storms, port disruptions and a strong dollar, while those in China faced a cooling economy in the first quarter and over-heating stock markets in the second.

Of these factors, China’s economic slowdown and accompanying shift from investment- to consumption-driven growth will have the greatest long-term impact on global trade patterns, hitting the world’s major commodity exporters particularly hard.

Nearly half of those surveyed expected to see government spending increase over the next five years, while 35% expected a decrease. The survey also shows that firms remain quick to cut staff when faced with uncertainty. In the past quarter, 41% of businesses have cut staff or ceased recruitment – nearly twice the number which have increased staff levels over the same period.

The major global concern was a rise in costs, with 46% of respondent worried about the impact, while foreign exchange movements were cited as a problem by more than a third of larger businesses which have cross-border supply chains.

But there was significant regional variation in the relationship between confidence in the economic outlook and willingness to take on new staff. In North America, the number of firms creating new jobs was actually greater than those expressing greater confidence in the economy. But in South Asia and Africa, by contrast, relatively high confidence had yet to translate into new investments in people. This may reflect a degree of uncertainty about the sustainability of business growth in regions that still face numerous internal challenges and external vulnerabilities.

Leong Soo Yee, Director (Asia Pacific) of ACCA, said, “Since the global financial crisis of 2008, China has been viewed as the engine of the world’s economy. Yet with more sturdy fundamentals re-emerging in the US and Western Europe, the role of Western consumers in driving demand is coming back to the fore

“ Looking ahead to the next quarter, overall confidence is set to rise in the wake of stronger economic reports coming out of the US and China. There are a critical number of factors affecting this. It is likely that the Federal Reserve will raise US interest rates before the quarter is out, which could intensify current currency trends though much of the impact would already have been priced in.

“The outcome of OPEC’s next meeting on whether to curb oil supply; the extent to which Indian Prime Minister Modi manages to implement his reform programme for India; and the ongoing negotiations between Greece and the rest of the euro zone, will be issues which could have a huge impact on business confidence in the second half of 2015,” said Leong Soo Yee.