Number of optimists among European CFOs plummeted, 30% chance of a recession
March 15, 2016
Since 2012, the number of pessimists among European financial directors has never risen so rapidly as in this first quarter of 2016. Whereas in the previous quarter only 25% of CFOs was gloomy about the economic prospects of the own country, this now applies to nearly 45% of CFOs. Employment has come under pressure in 2016, but hasn't withheld companies from continuing to make investments. These are a few business results from CFO Survey Europe, globally the longest running quarterly survey among CFOs, carried out by TIAS School for Business and Society (Tilburg) in collaboration with Duke University (North Carolina, US).
Economic sentiment worsens. A new recession is reckoned with
Among financial directors in Europe, only 18% take a positive view about the economic prospects for the coming 12 months. Consequently, the average level of optimism dropped to just 53 measured on a scale of 100. More than nine out of ten CFOs expects a recession this year, estimating the average probability of one at 30%. According to them, this can be especially attributed to factors such as the economic downturn in Europe, the political crisis and national budgetary deficits.
The continuing slump in China is considered to be a cause for concern. The number of optimists in this region has also significantly declined, with only 9% of those questioned still being positive and more than three quarters taking a negative view about the economic prospects for 2016. An alarming situation, because a hard landing in China will have an unprecedented major impact on the world economy. In this scenario, substantial decreases in raw materials, energy and import prices are extremely likely and in the long term the deflationary effects thereof will also further affect the already low European core inflation.
According to Kees Koedijk, dean and director at TIAS Business School, the biggest risk is lurking here. "For instance, a third of the European CFOs already forecast that a sustained period of low core inflation (under 1%) will eventually have negative consequences for financial business results. After all, in this climate companies will be less able to increase their prices and to keep them in pace with employment and production costs. More than half of the CFOs in our survey confirm this. If companies and consumers keep postponing their expenditure, in anticipation of sustained price decreases, then this may lead to long-term loss of demand. The weak demand might well bring about second-round-effects whereby companies will see themselves compelled to cut costs. If this also forces wages into a negative spiral, then the chance of a new recession will be ever more real."
Employment has come under pressure in 2016, but hasn't withheld companies from continuing to make investments
The slight economic confidence among financial directors also translates into a negative prognosis for employment. So for instance, in 2016 no growth in permanent employment is expected and companies even foresee an average shrinkage of 1.5% in temporary contracts. The average wage increase of 1.4% which is expected for the coming twelve months, has never been so low in the past three years. Nevertheless, financial directors expect that this will keep in pace with expected price increases (also an average of 1.4%).
That there is however no immediate reason for great unrest is evidenced by the intention of companies to continue to make investments. For instance, an average growth of 6.0% is expected in the coming twelve months. Also, in 2016 there will be a continuing decrease in expenditure on technology, with an average of 5.8% relatively strong. One of the technological innovations requiring a lot of attention at the moment is "big data". For instance, 30% of the CFOs surveyed indicated that the company is now adopting this. Some 12% of the companies has even got to grips with it and is now exploiting the possibilities.
Here you can read the complete dossier about the CFO Survey.