When we reported the first-quarter results of the Duke University/CFO Magazine Global Business Outlook Survey earlier this year, we noted that the optimism of U.S. CFOs was tempered by uncertainty about the economy. Pulling back for a global view — the survey compiled responses from 871 finance leaders from around the world — we can see that their misery, however mild, has company.
In every region we looked at, economic conditions were the largest source of the uncertainty causing finance leaders to hold back. The effects were most troubling in Latin America, where nearly all respondents (92 percent) said that uncertainty about economic conditions would have impacts on their companies’ capital spending, hiring, or cash reserves. At the same time, economic recovery was not seen as a sure bet in any region, with anywhere from 69 percent of respondents (in China) to 85 percent (in the United States) citing economic conditions as a drag on spending and hiring plans, in particular.
In Latin America, concerns about economic conditions were matched by worries about the domestic economic policies of the respondents’ respective governments. Policy concerns were at least 20 points higher in Latin America than in any other region.
Some of Latin America’s angst may be traced to the political environment: three-quarters of respondents said spending and hiring plans were more subdued because of the political situation. As a region, only Africa came close to this level of political concern, with 66 percent of respondents citing the political situation as a deterrent to growth. Elsewhere, especially in China, Japan and the United States, politics were much less a concern than were other elements of uncertainty.
Government: No Help
Most CFOs, regardless of their location, did not believe they could expect much help from government economic policies. In the United States, Asia (outside of China and Japan), and Africa, approximately 70 percent of finance executives said they would be more cautious about capital spending, hiring, or spending down cash reserves because of policy uncertainties. In Europe, 64 percentof respondents cited policy concerns, while nearly 6 out of 10 respondents from both China and Japan were similarly cautious.
In the same vein, two-thirds to three-quarters of the respondents from the United States, Latin America, Africa, and Asia feared that upcoming regulations could threaten their companies’ growth prospects. Regulatory implementation was not seen to be as much of a constraint in Europe, and even less so in China and Japan.
Perhaps surprisingly, government interference was least likely to be a problem for finance executives from China (including Hong Kong). Fewer than 4 out of 10 of these respondents felt that uncertainty over either regulatory implementation or the political situation there would impede capital spending, hiring, or the ability to deploy cash.
Expectations for Capex
Taken together, the doubts created by economic and political conditions were highest for respondents from Latin America, likely contributing to the pullback in optimism seen in that region. Still, the emerging economies in Latin America and Asia were expected to generate strong revenue growth in the coming year, at rates of around 9 percent. But to achieve this growth, companies in these regions are more likely to draw on the resources they’ve built up over the last few years than they are to make additional investments. Capital spending was projected to increase by only 4.2 percent in Latin America, 3.1 percent in China and 2.1 percent in Asian countries other than China and Japan. Outlooks for full-time employment were either flat (Asia, Latin America) or declining (China).
Similarly, finance leaders from Europe expected to optimize existing resources in their continent’s slower return to financial stability. They anticipated an average of only 3.7 percent growth in capital spending for 2014, while full-time employment was expected to continue its decline, although at a slower rate (-1 percent) than seen in recent years. These efforts were expected to generate revenue growth of 4.9 percent, which, while only at half the levels seen in still-developing economies, at least represents a positive step out of recession for them.
Finance executives from Africa were the most down on hiring, projecting a 2 percent decline in full-time employment. However, companies there appear to be at the stage of development where capital spending is needed in order to fuel their growth plans. Respondents from Africa projected the largest growth of any region in capital spending (11 percent), and their anticipated revenue growth of 9.5 percent essentially put them in a tie with Asian countries for the top rate.
In contrast, relatively strong capital spending in the United States and Japan (increases of 6.8 percent in the United States and 7.8 percent in Japan) is expected to result in more modest levels of revenue growth (5.9 percent and 4.4 percent, respectively). The U.S. employment outlook remained sluggish, although still positive, at 1.2 percent, while in Japan respondents expected a boost in full-time employment of 2.4 percent over the next year. For these two countries, slow but steady still seems to be the order of the day.
One potentially positive note arising from the first-quarter survey: Significantly fewer finance executives felt compelled to build cash reserves as a buffer against economic downturns. In the United States, only 37 percent of respondents said economic uncertainty would cause their companies to increase cash holdings, and the numbers were even lower in other regions.
Even if they are not bursting with confidence in their governments, finance leaders do appear to be sure enough of their own companies to start cautiously deploying resources toward more constructive ends, rather than simply battening the hatches.