Weekly Economic Briefing: CFO Sentiment – a glass half empty as global, local factors hit confidence

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

CFO Sentiment: a glass half empty as global, local factors hit confidence

Deloitte’s latest CFO Sentiment survey shows that Australian CFOs are feeling less optimistic about the future than they were in the first half of 2018 – on the back of weaker domestic and global economic outlooks and rising uncertainty.

The key points from the H2 2018 survey are:

  • Net optimism among CFOs is down to 66%, from 73% in the first half of the year
  • 66% are uncertain about the economic and financial environment facing their company
  • 76% think house prices will be lower in 12 months
  • However, 53% feel the share market will recover somewhat in 2019

Only six months ago, strong global economic conditions were flowing through to the Australian economy, and this was driving CFO optimism. With both global and domestic conditions now facing challenges in the year ahead, CFOs feel less certain about the future, and this is hurting optimism, and risk appetite, heading into 2019.

Chart 1: CFO uncertainty and risk appetite

Rising trade tensions between China and the US, and the possibility of a global economic slowdown, have emerged as major drivers of weaker CFO confidence and increased uncertainty. On a positive note, the US-China trade conflict has so far played out slightly better than feared: when asked earlier in 2018, 56% of CFOs had expected the trade conflict would negatively impact their business, while now only 39% feel it is negatively impacting their business.

On the domestic front, the number of CFOs feeling negatively about the Australian economy now outnumbers those with a more positive perspective. The decline in the local share market seen in 2018 was a key driver of this weak domestic sentiment.

With more risks to the outlook, and lower confidence about future operating conditions, a majority of CFOs believe government stimulus would benefit the economy. With the improved federal budget position, 55% of CFOs feel that additional revenue should be spent on government investment on the likes of infrastructure or education. This is a significant shift in sentiment compared to the first half of 2018, when nearly 60% felt revenue gains should be used to reduce the deficit at a faster rate.

While Australia’s economic outlook still remains broadly positive, global and domestic risks remain that could threaten growth and business confidence. House price declines, and their potential impact on consumer spending, remain front of mind for many, including Australia’s CFOs, and more than 75% think prices have further to fall over the next 12 months. On the other hand, given the large decline in the share market through 2018, just over half feel the share market will recover. Expectations for interest rates are predominantly that they will be either the same or higher, and Australia’s exchange rate will remain largely unchanged over the next year.

For more information on the Australian brief, please contact co-authors David Rumbens and Emily Dabbs.

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: https://blogs.deloitte.co.uk/mondaybriefing/

  • The financial crisis of 2008-09 pitched Western economies on to a lower growth path. In recent years growth across the industrialised world has run well below the rates seen in the years before the financial crisis.
  • The slowdown came much earlier for one major economy. Japan’s post-war boom ended in the early 1990s with a recession and a collapse in the equity market. Since then growth rates have averaged around 1.0% a year, a quarter of the rates seen in the ‘70s and ‘80s.
  • For most Western countries low growth is a phenomenon of the last ten years. For Japan it has been going on for a quarter of a century, exacerbated by a shrinking and ageing population. The steps Japan is taking to try to bolster activity show how other Western governments could try to tackle their own, more recent, growth problems.
  • GDP growth is determined by the growth in the number of hours worked and the productivity of workers. Japan is trying to raise both. Japan needs more people to work, and to stay in work until later in life.
  • Female workforce participation has risen sharply in recent years. More than half of Japanese women now return to work after childbirth, up from 38% in 2010. Female labour force participation has risen above the US for the first time in more than 40 years. However, with a high proportion of Japanese women in part time and non-regular jobs there is significant scope to improve the quality and amount of work available to women – and in so doing raise growth.
  • Japan’s growing population of older people are the second group that the government is trying to encourage back to work. Rising life expectancy – and Japan’s is the highest in the world – has already raised the effective retirement age. A higher proportion of over-65s are in work in Japan than in any other major industrialised nation. But with 28% of the population aged over 65, roughly double US levels, and with that share rising, the authorities want to do more. The government is increasing the public pension for those who choose to draw it later and is considering raising the retirement age for civil servants.
  • The most obvious response to an ageing population would be to increase immigration. In Japan this remains controversial. By Western standards Japan is a homogeneous society with a strong cultural identity. Immigration rates have risen but are low, with 2% of Japan’s workforce foreign-born, compared to 17% in the UK. Most foreign workers have no route to permanent settlement. In 2016, the latest year for which data are available, Japan accepted 95,000 permanent immigrants, rather less than Belgium and Austria and fewer than one-tenth of the number accepted by the US or Germany.
  • The climate has changed somewhat in recent years. In December, after bitter debate, Japan’s parliament passed a bill to accept more than 345,000 overseas blue-collar workers into areas of acute labour shortages – albeit for five years and without their families. The bill also created a second visa category, for high-skilled workers who could bring their families to Japan. Immigration seems likely to increase, but to levels far below those in other rich countries and on a very selective basis.
  • Japan’s government is also trying to raise productivity growth. Part of this lies in shaking up existing ways of doing business. Successful structural reform is the holy grail of economic policy. Mrs Thatcher pulled it off in Britain through privatisation, tax cuts and union reform. Changes to labour regulation in the early 2000s helped transform Germany from a high to a low unemployment country.
  • Japan wants to reform its labour markets, particularly getting more women into work, liberalise agriculture, cut corporate tax and improve regulation. It’s a sobering rule of structural change that before it creates winners it creates losers. France’s Gilet Jaunes are a manifestation of this rule. There has been no great backlash against reform in Japan, but progress has been slow. Last year the IMF called for the government to reinvigorate its programme of structural reform.
  • The other great hope for Japan lies in technology. Japan’s factories are highly automated, with robots more prevalent than in virtually anywhere else in the world. The challenge is to repeat this success in the often labour-intensive service sector. (For Western consumers inured to self-service checkouts the prevalence of human lift attendants in Tokyo department stores is both delightful and extravagant.)
  • Researchers are working to develop robots that can deal with non-routine tasks, from cooking to caring for elderly people and cleaning, where humans beat machines hands down. Japan produces plenty of eye-catching stories of robotic advances. But, as with the famed hotel run by robots which opened in 2014, the reality is sometimes less sensational. Last month the hotel ‘fired’ half its robots for the simple reason they couldn’t do the job, replacing them with people.
  • In time necessity may yet prove to be the mother of invention. In a land with few migrants, with unemployment at just 2.3% and endemic labour shortages companies are working hard to develop machines to augment and replace humans. Given Japan’s success in factory robots it might seem rash to bet against them.
  • Japan’s experience confirms that all routes to faster growth are hard. Progress has been patchy and Japan’s growth rate remains lacklustre. Yet the surge in the number of women and older people going out to work demonstrates that change can happen.
  • Japan has the unfortunate distinction of leading the rich world in terms of challenging demographics and slower productivity growth. The rest of the rich world has similar, if less acute, problems. The success or failure of Japan’s experiment will offer lessons for us all.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.7% at 7,071.

Economics and business

  • The Bank of England (BOE) downgraded its UK growth forecast for this year from 1.7% to 1.2%, which would be the slowest rate of growth since the recession in 2009
  • The BOE voted unanimously to keep interest rates at 0.75% and signalled that they would remain on hold in the near future
  • UK service sector activity stagnated in January and new orders fell for the first time in over two years, according to PMI numbers from IHS Markit
  • The EU cut Italy’s growth forecast for 2019 to 0.2%, its lowest level in five years
  • Retail sales in the euro area fell sharply in December; the decline in Germany was the sharpest in 11 years
  • German finance minister Olaf Scholz said slower economic growth would mean increased tension between spending priorities due to lower tax receipts, but talk of a German recession was wide of the mark
  • Euro area investor sentiment fell to its lowest level since 2014 in February, according to the Sentix index
  • In a sign of the scale of the US shale oil boom the US has become the UK’s largest oil supplier for the first time since the Suez crisis
  • Fears over an escalation of the US-China trade war increased after President Trump said he has no plans to meet China President Xi Jinping before US tariffs on Chinese imports come into force next month
  • According to the Wall Street Journal the end of China’s one-child policy in 2016 has failed to bring an expected boom in births
  • Early results from a large Finnish experiment o providing a minimum basic income to unemployed people shows that recipients were happier and less stressed but no more likely to seek work than those in a control group
  • Total borrowing by OECD governments is set to reach a record high of $11tn in 2019, with recent rises driven by the US
  • Research by the think-tank Civitas shows that between the proportion of UK 20-34 year olds living with their parents has risen from 19% to 26% since the late 1990s

Brexit and European politics

  • European Council president Donald Tusk said that there is a “special place in hell” for “those who promoted Brexit without even a sketch of a plan of how to carry it out safely”
  • Prime Minister Theresa May visited Brussels with the aim of securing legally binding changes to the transition agreement that would help her Brexit deal pass in Parliament
  • The EU insists it will not reopen discussions on the Irish border backstop
  • BOE governor Mark Carney said “The fog of Brexit is increasing the chance of a recession” in the UK
  • UK Labour Party leader Jeremy Corbyn set out five demands for supporting a Brexit deal including that for a UK-wide customs union with the EU
  • UK international trade secretary Liam Fox said he couldn’t rule out the possibility of the UK cutting import tariffs to zero in the event of a no-deal Brexit
  • UK business secretary Greg Clarke said that delaying Article 50 would only prolong the uncertainty facing businesses
  • Japanese car maker Toyota committed to its manufacturing plans in the UK a week after rival firm Nissan said it will move a proposed new manufacturing plant from the UK to Japan. Nissan’s decision reflected the sharp downturn in the European diesel market, with Brexit an aggravating factor
  • The UK government is drafting plans to boost the economy in the event of a no-deal Brexit, including options ranging from cutting taxes, boosting investment and slashing tariffs, the FT reports

And finally… UK discount store Poundland is selling engagement rings just in time for valentine’s day. The Bling Ring range, priced at £1, went on sale last month and the retailer sold 20,000 pieces in just seven days – sterling proposal


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