Global business optimism drops to a depressing 3% in Q3 2011

Wondering if Singapore is as pessimistic?

The latest research from Grant Thornton’s International Business Report (IBR) reveals that net global business optimism has fallen from 31% in Q2 to just 3% in Q3. Ominously, this uncertainty has also spread to key emerging markets with both China and India seeing net optimism decline by 29 percentage points, the highest drop amongst the Asia Pacific economies. Singapore businesses follows with a drop of 27 percentage point in Q3 (37%) from 64% in Q2.

Aw Eng Hai, Partner of Foo Kon Tan Grant Thornton LLP said, “Given our small but open economy, negative sentiments about the wider economy will affect our growth prospects. In the light of the current economic uncertainties and financial instability, the pandemic collapse in business optimism during the third quarter is the worst since 2009 when the world was in the midst of the global recession.”

The optimism of business owners in mature markets has been hit particularly hard; in North America optimism has dropped from 43% to 3%, and in the EU from 34% to 0%. Asia Pacific (excluding Japan) saw a drop from 49% to 25% and BRIC from 44% to 25%. Globally, businesses are telling us they feel they have no control over how things are going to turn out. There’s a perception that attempts to create stability and stimulate growth just haven’t worked. An economic outlook that appeared to be improving just three months ago has been replaced with one of total uncertainty.

The prospect of businesses driving growth is being constrained by the on-going uncertainty, especially in many mature markets where governments and consumers are reigning in spending. Globally a shortage of demand is now the single biggest constraint on growth facing businesses around the world, cited by 32% of businesses in the last quarter. This is also one of the top two worries along with the shortage of skilled workforce that Singapore businesses have to grapple with. In the face of uncertainties, Singapore businesses remain cautious as evident in the quarter-on-quarter drop in investment in plant and machinery and new building.

Two years ago, the feeling was that the emerging markets would underpin the global recovery. Now they are suffering a crisis of confidence too. The problems in Europe, which provides a huge export market for emerging economies, together with the increase in their own domestic problem, particularly rising inflation, begs the question: who will be in a position to lead the global recovery this time?

The European sovereign debt crisis is a major contributor to the lack of confidence felt in emerging economies. The ECB Governing Council meeting this month therefore assumes even greater importance than usual. Economies will not grow and regain confidence if businesses and consumers remain nervous about spending. Speculation is rife that the ECB will lower interest rates to try and boost spending, but although this will help, in isolation it will not be enough. Agreeing a package of measures to restore both stability and confidence is arguably the single biggest challenge policy makers face.