Mature economies play confidence catch-up

14 March 2011
Mature economies have gained on their emerging market competitors in business optimism during the first quarter of 2011. According to Grant Thornton’s latest International Business Report (IBR) the gap has narrowed dramatically and in a short period of time. While this suggests that imbalances in the speed of economic recovery might begin to ease, emerging markets regions such as Latin America continue to remain the most optimistic in their economic outlook.

Overall, global confidence is at its highest since the beginning of 2008 at +34%, in the first quarter of 2011. Between the last quarter of 2010 and the first quarter of this year the G7 group of economies saw an upswing of 16 percentage points in optimism about the prospects for their country's economy. In contrast, optimism levels in Latin America declined (4 percentage points), with Brazil recording a fall of 15 percentage points. Optimism in the BRIC group of economies (Brazil, Russia, India, China) increased marginally, by 3 percentage points.

The US in particular witnessed a surge in optimism, up 19 percentage points. Italy registered a 30 percentage point upswing and Japan, although still the most pessimistic of all economies surveyed, increased its business optimism by 13 percentage points.

Ed Nusbaum, CEO of Grant Thornton International, said: “Although there has been a two speed recovery, with emerging markets generating growth faster than mature markets, there are early signs that inroads are being made to address this imbalance. Confidence has increased significantly over the past quarter in G7 economies. This mirrors what we have seen in financial markets as mature economies are being viewed more favourably since the turn of the year. A global recovery without the US is difficult to envisage, so it is encouraging that growth and a fall in unemployment appear to be giving cause for greater optimism. This should give cheer to emerging as well as mature economies.

“Emerging markets are grappling with global imbalances and business constraints, and this is undoubtedly affecting confidence. Brazil and Russia are seeing appreciating currencies making exports more expensive, so much so that Brazil has called for fundamental reform to international currency systems. Inflation and interest rates have also increased, and as a result we are seeing a fall in optimism about the economic outlook.

“Overall, we would expect the gap in optimism to continue to close as emerging markets face constraints on growth. However, the ongoing political turmoil across North Africa and the Middle East could have a real impact on the outlook of businesses in a number of economies. Big oil importing countries, and many businesses within them, will watch on with some discomfort should unrest in these regions continue to spread and push up oil prices further."

Skills shortage threatens emerging markets
The survey, conducted amongst over 5,700 privately held businesses across 39 economies, reveals that 42% of businesses in the BRIC economies believe a lack of availability of skilled labour will constrain their ability to grow this year. This is a 17 percentage point upswing on 2010 and is now the most cited constraint on growth in these countries. Latin America shares the same concern, with 43% of businesses citing a lack of skilled labour as a constraint, an increase of 20 percentage points.

Half of privately owned businesses in India (51%) and Brazil (49%) stress that a lack of availability of skilled labour will constrain their ability to grow this year. The problem is also a major issue for businesses in mainland China (40%), Thailand (46%) and South Africa (37%).

Ed Nusbaum added: “A lack of skilled workers will weigh on the confidence of businesses in emerging markets and they will find this a very real obstacle to their growth. A clamour for skilled people will cause wages to rise, especially in countries such as Brazil where they are already nearing what would be considered full employment. This in turn will inflate selling prices and will narrow the competitive advantage in some emerging economies.”

“In the short term this constraint might see a relaxing of policies on immigration to increase the import of the necessary skills. In the long term governments will need to address how they appropriately educate and skill their people in order to fuel economic growth. For now, however, observers will be looking to see the inflationary pressure it will create.”

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