High inflation and low investment hampers recovery, ACCA survey shows

Published August 10th, 2011 - 03:00 GMT
Unlike the previous quarter, most of the pressure on access to finance appears to be concentrated on Asia-Pacific and the Middle East
Unlike the previous quarter, most of the pressure on access to finance appears to be concentrated on Asia-Pacific and the Middle East

Of the 2,186 Association of Chartered Certified Accountants (ACCA) members surveyed between 16 May and 6 June 2011, only 26 percent reported increased confidence, down from 28 percent three months ago, with 57 percent saying that economic conditions are either deteriorating or stagnating, up from 51 percent only three months ago.

While the rocketing inflation of the first quarter of 2011 was not repeated in the second three months, a greater proportion of those surveyed, 54 percent – up from 51 percent in the last quarter – reported an increase in operating costs. This is double the number of respondents who mentioned inflation two years ago. The survey shows that rising costs are not just confined to the fastest-growing economies.

While best performing markets Malaysia and Pakistan are leading the inflation league table, rising costs were also cited by 45 percent of respondents in Western Europe, which has been affected by the continent's debt crisis, still sits at the bottom of the ranking in terms of business confidence and economic optimism. The survey shows that businesses are becoming increasingly unable to respond to the inflationary challenge through cost-cutting.

Around 30 percent of respondents expect their governments to get spending decisions right in the medium-term, but 16.5 percent expect dangerous levels of over- or under-spending and this group has been growing every quarter since late 2009. Access to finance has been tightening globally for the past six months, and this appears to be the case for both growth capital and short-term liquidity. This, combined with rising costs, now appears to be leading to an increase in the number of respondents who fear that customers (31 percent) or suppliers (15 percent) might go out of business, as well as those reporting problems with late payment (31 percent).

Despite these worrying trends, confidence figures among finance professionals have not yet dipped to a situation where they believe there will be a renewed downturn. For the past two years, professionals in Africa and the Asia-Pacific region have been consistently more optimistic than their colleagues elsewhere about the state of the economic recovery, and this resulted in high levels of confidence in their own organisations.

In this survey, however, confidence is surprisingly low in both regions, with Asia-Pacific recording a net loss of confidence for the first time in two years. Hong Kong and Malaysia seem to be particularly affected, while Singapore has bucked the trend by recording further confidence gains.

While the gloom in the Far East reflects the fallout from the disaster in Japan, flagging confidence in Africa is mostly a lagged effect of the slowdown elsewhere. The GECS results show that the impact of a drop in activity in OECD countries has for the last few months been trickling down the supply chain, first to the Asia-Pacific region and then to Africa. However, unlike the previous quarter, most of the pressure on access to finance appears to be concentrated on Asia-Pacific and the Middle East.

Under these challenging conditions, profitable value-added opportunities of most types have become scarcer and the investment environment has deteriorated slightly, especially in terms of financing and business support. Still, investment itself has remained flat and the outlook for employment and investment in staff has even improved slightly. This is almost certainly related to the slow recovery in new orders.

Deepak Chainani, ACCA Country Manager - UAE & Qatar, said, “There are a number of concerns in the latest report, including that the loss of momentum in Asia and Africa has become particularly pronounced in the last few months. The limits of austerity are also being explored in Western Europe and a renewed tightening of credit and cashflow conditions could be on the cards, even as new orders and employment are beginning to recover.

“If these new trends - coupled with high inflation and low investment - persist we would expect to see further instability in the near future, which will present more challenges for all sectors professional accountants whether they work in practice or industry in the second half of 2011.” Credit crunch persists in the Middle East, but hopes of a Government-aided recovery boost confidence.

The view of finance professionals in the Middle East suggest that access to finance is particularly tight in the region, with 54 percent of respondents reporting problems. Cash flow problems are also significant; more respondents (23 percent) are worried about suppliers going out of business here than in any other ACCA region. As a result of the two, the outlook for investment is very subdued. On the bright side, this region appears to be less affected by inflation than any other, although a third of respondents still cite this as a problem.

Still this quarter's data are likely to mark a significant improvement over the last quarter – with 42 percent of respondents reporting confidence gains and 53 percent believing that the global recovery is on track, the Middle East is ACCA's most confident region and second only to Africa for economic optimism. This is partly due to the fact that respondents expect government spending to increase substantially in the medium term and generally feel that expansionary fiscal policy would be sustainable: only about two percent expect dangerous levels of overspending.

The outlook for employment is very volatile, with respondents in the region more likely to report both staff cuts and new job creation than anywhere else. Foreign expansion, stronger business partnerships and cost cutting appear to present the most opportunities for businesses, while respondents here also see more opportunities for their organisations to profit from changes in customer behaviours and needs than those in other regions.

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