Consumer Confidence Slides; World’s Executives Worry
The optimism of early 2010 has given way to a lot more caution from the world’s business decision-makers. Three months ago our business barometer passed the halfway ’50′ mark for the first time since we began our quarterly global survey of functional executives, but confidence has subsided since then and the business barometer now stands at 47.8.
Executives are not overly worried (the reading is not at the 43 rating we saw in Q4 2009) but neither do they foresee a strong recovery any time soon. This fear is driven by their predictions of persistently high unemployment levels over the next 12 months that will erode consumer confidence. These results fit with our ongoing observation that the recovery will be neither quick nor easy for the world’s companies.
As we’ve said before, what makes this survey interesting is that the views of the 450 executives surveyed are not based on ‘gut feeling’ but on what they are hearing as heads of finance, sales, supply chain, and HR. The findings provide good insight, therefore, on the thinking that will be behind many business decisions in the months to come.
Consumer Confidence Hits Revenue Growth; Cost Pressures Remain Low
Executives are particularly worried about growth prospects for the U.S. and EU economies. Only 32% of executives see stronger growth in these economies compared to 48% in Q1 and 55% in Q2. And, because low growth will drive higher unemployment, executives’ views on consumer demand are even worse: only 38% expect consumer confidence (a proxy for consumer spending) to improve in the next year, compared with 51% in Q1 and 60% in Q2.
But executives still find solace in the potential of emerging market economies, and 68% predict that their firm’s revenues will increase in the next 12 months (down from 70% in Q2), although the majority of them only expect minor growth of 1-4%. They see sales to new customers outpacing sales to existing customers and still expect increases in R&D and capital expenditure (CapEx). This isn’t surprising as executives have made investment decisions in the past six months, and they won’t reverse those decisions lightly.
Executives also expect a minor increase in costs over the next year: 63% see costs rising but the vast majority only see a 1-4% rise; no-one expects high global inflation. HR executives are the only ones to sound a note of caution: 54% believe that labor costs will rise; they are also concerned with higher cost of health care, lower employee engagement, and higher unwanted turnover.
Breakdown by Function
Finance Indicators: Finance executives’ positive sentiment has deteriorated marginally since the second quarter. Fifty-one percent expect CapEx to rise (down from 55% in Q2), with IT benefiting from the greatest increase. They expect an increase in the number of M&A deals and the size of R&D budgets. However optimism has subsided: only 51% expect to increase the number of M&A deals (down from 63% in Q2).
Supply Chain and Operations Indicators: Operations executives’ outlook remained cautiously neutral in Q3. While two-thirds of supply chain executives continue to expect a boost from rising new orders and higher production levels, their sentiment about the introduction of new products has deteriorated. A silver lining is that less than half (47%) expect higher supply chain disruption risk (down from 51% in Q2).
Sales Indicators: Sales executives’ outlook has deteriorated marginally but remains cautiously positive. More than two-thirds expect rising sales to new customers and more than half expect to increase sales to existing customers. While they don’t anticipate changes in the average sales cycle, 80% of them expect their reliance on discounts to be the same or higher.
Marketing Indicators: Marketing executives’ outlook has remained cautiously optimistic. Executives’ budgets and staff are expected to be stable in the next twelve months and their outlook for customer loyalty has improved.
HR Indicators: The HR Barometer fell to an index number of 39 (on an index of 1-100) for Q3 clearly indicating a negative sentiment. More than two-thirds of HR executives expect a moderate increase in average labor costs (from 1-4%). Unlike in the previous quarter, executives expect lower employee engagement and higher unwanted turnover.
IT Indicators: The IT Barometer stands at an optimistic index number of 58 (compared to 57 in Q2). Fifty-four percent of the IT executives expect higher discretionary CapEx on IT, up from 47% in Q2.
So it’s not all bad news but the business barometer shows there’s no reason to predict a strong recovery. Firms should continue to invest in long-term projects (as the best will always do) but make sure they scrutinize every decision extremely carefully. CEB clients should contact me to discuss any of these issues further
Click here to view the full Q3-2010 Business Barometer Report