Concerns about Europe, global economy drive down economic optimism

Europe’s debt crisis is contagious. The economic ills of the region have contributed to dampening forecasts in other parts of the world, according to a new survey of management accountants.

The second-quarter CGMA Global Economic Index, released Tuesday, retreated, erasing the gain registered in the first quarter. Meanwhile, CGMAs—particularly in Europe and the U.K.—have a dourer outlook for the months ahead. Many predict lower revenues and profits, and they expect to clamp down on hiring.

At the beginning of 2012, executives seemed more hopeful about the prospects of the global economy. The CGMA Global Economic Index climbed from 58 at the end of 2011 to 65 during the first quarter of 2012. A rating above 50 is regarded as positive.

But the latest index—calculated from responses of 609 finance decision-makers such as CFOs, CEOs, and controllers—dropped to 58. In developed regions, the U.K. registered the biggest drop (down 12 points to 50), followed by Europe (down 10 points to 47). The survey, which measures the U.K. and Europe separately, was conducted between May 23 and June 18, before EU leaders agreed to create a single banking supervisor for the euro area, which would allow for a more direct way to recapitalize banks.

In Asia, which has been propped up by China’s robust growth, the index fell seven points to 58. In the United States, the most optimistic developed region in the first quarter, the index fell five points to 64. If Europeans are not in a buying mood, and the survey says they are not, that can weigh down manufacturing in the United States and China, both key suppliers to Europe.

“I’m most concerned with the euro falling,” said Mick Armstrong, CPA, CGMA, the CFO of Micro 100 Tool Corp. in Meridian, Idaho. “Their softening economy just makes a smaller pie that we’re looking for a piece of.”

Evidence of Europe’s ills spreading

Executives’ outlook for their own companies dropped sharply in Europe. Just 27% of European executives had an optimistic outlook for their companies, down from 51% in the first quarter. In the U.K., company optimism fell from 54% to 38%. Dim prospects in Europe and the U.K. have dampened the outlooks of foreign companies that do business in those regions. 

Take Osborn International, a U.S. company that makes wire brushes and other buffers and finishing products used on equipment such as street sweepers all over the world.

Jeff Schad, CPA, CGMA, the company’s CFO, said first-quarter growth was strong, especially in North America. But he saw a decline in southern Europe and expects that decline to spread to the north.

“Northern Europe is still OK, although we’re very nervous about what’s happening,” he said. “We haven’t seen a pullback yet, but we expect to.”

Downward trend globally

Projections for revenue and profit are down across regions in the survey.

In Asia, for example, projections for revenue increases for the next 12 months dropped from 4% in the first-quarter survey to 3.1% in the second. Projected profit increases fell from 3.4% to 1.5%. Asian respondents are significantly less confident about domestic economies, with optimism dropping from 46% to 31%. Their optimism in the global economy dropped from 12% to 7%.

The expected revenue increase for all regions in the next 12 months is 2.7%, down from 4.1% in the first quarter. Projections for profit increases fell from 3.5% to 2%, and the number of employees is expected to grow just 0.6%. In Europe, companies expect to cut staffing by 1.1%.

More than half of Osborn’s projected $190 million in revenue is expected to come from Europe this year. Schad is keeping an eye on whether the company will hit the mark. He says Osborn is looking to strengthen its presence in developing markets such as Brazil.

“We’re cautious in the mature markets and continuing to invest in the emerging markets,” Schad said Wednesday during a webcast to announce the survey results.

Micro 100 makes carbide cutting tools for industries such as aerospace, automotive, and medical. Armstrong, Micro 100’s CFO, said business in the United States has hit a plateau after a strong first quarter. About 10% of the business is overseas, where Micro 100 has had to offer discounts to entice customers to buy.

“Some of what we’re seeing in the U.S. is caution,” he said. “I’m not really seeing anybody saying, ‘Woe is me.’ ”
 
Other key findings in the survey:

• In the United States, company optimism fell modestly, from 58% to 51%. Global optimism in the United States was weak, dropping from 22% to 12%, and domestic optimism fell from 44% to 36%.
• Organization optimism fell across all industries, with the steepest drop in manufacturing (63% to 45%) and technology (55% to 41%). Banking saw a small decrease (50% to 48%), though banks were the only entire sector that expected to cut back on staffing, at a rate of 1.5%.
• The region known as RoWE (rest of the world—emerging), which includes the Middle East and Africa, showed the least pessimism. That group’s overall index dropped from 71 to 69, and it had a small increase in domestic optimism, from 41% to 44%. The respondents expect profit and revenue to drop—but at much lower rates of decline than other regions.
• RoWD (developed countries of Australia, Canada, and New Zealand) has a dim view of the global economy, with just 5% of respondents saying they were optimistic or very optimistic. That’s down from 10% the previous quarter. That group’s domestic optimism is 36%, down from 53%.

“Our survey shows there is still a risk of a knee-jerk reaction by organizations, with economic pessimism leading to an investment freeze on areas that are the bedrocks of future success, such as training, recruitment, R&D, and capital investment,” said David Rowsby, regional director–Europe, CIMA. “Organizations should resist short-term pressure from the investment community and not be distracted from their longer-term growth plans.”

One expert on the European economy said during the webcast that the region has grown tired of repeated bad news.

“We’ve been in this crisis for the better part of five years,” said Alasdair Ross, global product director at the Economist Intelligence Unit. “I think there’s some exhaustion setting in. It’s hard to plan for anything in this economy, where any promise is taken away before it’s delivered.”

Ross said minimal economic growth in countries such as Germany and France was offset by large declines elsewhere on the continent, which in turn affects the global outlook.

“Europe is a massive player and a gigantic trading partner for other economic hubs in the world,” Ross said. “European peripheral economies are shrinking quite rapidly, and that has a huge anchoring effect on the rest of the economy.”

—Neil Amato (namato@aicpa.org) is a JofA senior editor.