November 2013

Economic outlook

9th Australasian Capital Confidence Barometer

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Q. What is your level of confidence in the following in the local economy?

EY - What is your level of confidence in the following in the local economy?
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Q. How do you think the Boardroom agenda at your company has changed from a year ago?

EY - How do you think the Boardroom agenda at your company has changed from a year ago?
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Modest growth

Executives are increasingly confident of local economic growth, laying the ground for increased activity in the coming deal-making environment.

More than three quarters of respondents (80%) believe the local economy is stable or improving, — albeit at a more modest rate (1-3%). With greater credit availability and expectations of economic growth, M&A activity is inevitable as companies find themselves and the economy on a sounder footing.

However, with confidence being so low for so long, the transition to growth is happening slowly. We have seen a lag between increasing business confidence and action to take advantage of improved sentiment. While this may be due to a long period of global economic uncertainty combined with local political uncertainty, as these worries recede companies will have the confidence to make longer-term decisions.

  • 93% expect the local economy to grow, compared with 86% six months ago

  • Local and global economies set to improve

Asked about their views on the state of the economy, the vast majority of respondents forecast an improving outlook — both globally and locally.

Australasian respondents who see the global economy declining fell from 26% a year ago to just 10% in October 2013 — the lowest level in over two years. Over 60% said they expected modest growth. At home, where Australia had just been declared ‘open for business’ by the new Federal Government, 80% thought the state of the economy was improving or stable.

That said, these responses came before the US government shutdown in October and its threat of default. Fortunately this crisis seems to have been averted and global indicators support cautious optimism. US growth is gradual, but evident; China’s position has improved; and the world had avoided war in Syria. While growth in Europe remains elusive, most commentators agree the global picture is improving.

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  • Australasian growth expected at 1-3%

Almost all respondents anticipate the local economy will grow, but expectations about the pace of growth remain modest.

The election appears to have bumped up confidence in Australia’s economic stability, removing the uncertainties created by minority government and leadership tensions. With a greater sense of policy certainty and the prospect of at least modest growth, companies are beginning to see light on the horizon.

  • Corporate earnings jitters

Respondents are less optimistic about corporate earnings, with positive sentiment dropping from 64% to 46% in the past six months – despite increasing confidence in economic and employment growth.

This slide in earnings confidence may be linked to corporate concerns about where to find new growth. With significant earnings growth already squeezed out of cost savings, and only modest GDP growth forecast, many companies will have to change strategic direction to drive revenue and overall earnings growth.

Q. What is your level of confidence in the following in the local economy?

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  • Capital allocation moves up the boardroom agenda

Supporting this trend, although efficiency and risk management remain at the top of the boardroom agenda, capital allocation is back in the spotlight. A year ago, only 49% of respondents said capital allocation was getting more attention. Today, 67% view this as a higher priority for boards, indicating a change in sentiment.

These findings still reflect continuing caution as companies aim to hold onto the gains they’ve made after several years of cost cutting. However, it also demonstrates a renewed focus on capital allocation, indicating potential changes in investment intentions as corporate strategies change to put growth back on the agenda.

Q. How do you think the Boardroom agenda at your company has changed from a year ago?

  • Global political instability still a key risk

Despite increasing confidence in the global economy, 41% of local companies still rate global political instability as the biggest economic risk to their business. Reflecting the shape of our trading relationships, the prospect of continued slower growth in China is a far greater challenge for local companies than the ongoing Eurozone crisis.

This is in sharp contrast to global opinion, where 28% of companies rate the Eurozone crisis as the greatest economic risk to their business, compared with 14% of local respondents.

  • 41% believe global political instability is a barrier to growth, while 25% are concerned about growth in China

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