Written by Faye Chua, head of business insights, ACCA
IN 1968, when asked about the impact of the French Revolution, the then Chinese premier Zhou Enlai is famously alleged to have quipped ‘it’s too early to tell.’ Given that it’s been little more than a month since the UK voted to leave the European Union, snap judgements about the economic impact of such a complex and unprecedented decision should be taken with a pinch of salt.
Yet what is clear from the ACCA & IMA’s most recent Global Economic Conditions Survey (GECS), is that the referendum-induced uncertainty shock to international business confidence has been significant. Although the survey was conducted before the referendum result, even the potential of Brexit weighed heavily on business sentiment.
In particular, George Osborne’s undelivered threat of an austerity budget in the event of a Leave vote inevitably saw a crash in expectations of government spending. This was matched by a similar downturn in capital investment and employment hiring as the UK’s future relations with a major trade partner were thrown into doubt.
Of course, after weeks of unprecedented political upheaval, the UK has a new prime minister, Theresa May as well as a new chancellor. Philip Hammond has rejected Osborne’s threatened ‘punishment’ budget and, alongside new Mayor of London Sadiq Khan, has been quick to assert that the UK remains ‘open for business.’
While these steps have offered some reassurance to jittery markets and alleviated some of the fears of economic crisis in the immediate aftermath of the referendum, there remains a strong chance of contraction in the next two quarters at least. On the whole, UK firms are now more downbeat about their prospects than at any time since the final quarter of 2011.
In many ways the referendum could not have been less well timed taking place just as there were signs of a global improvement in business confidence. Fears over currency devaluation in China had eased following some judicious government intervention and a consumer-led boost in confidence in the US, combined with stable labour market demand, were contributing to a more upbeat outlook. Meanwhile, a rise in commodity prices had stabilised conditions in those economies in the Middle East and Africa where governments depend heavily on export revenues.
Yet while Brexit has undoubtedly provided an unwelcome blow to confidence across the OECD, we should also be cautious about overstating the strength of global business sentiment more generally. Although the figures highlight a more optimistic outlook, this hasn’t yet translated into improvements in capital expenditure and employment indices. In fact, half of firms are still either cutting or freezing employment, with only 13% increasing investment in staff. Nearly 41% are reducing capital investment.
Indeed, respondents were careful to note that, the short-term shock of the result aside, the present uncertainty around the UK’s relationship with the EU should not necessarily distract from on-going problems in the global economy.
Outside of the UK, the immediate impacts of the referendum result have inevitably been most visible in the eurozone. Confidence in Western Europe slumped to the lowest level since 2012, despite a growing sense that the area has been moving away from crisis. Businesses reporting cuts in employment and investment were well below the global average as members benefitted from a partial easing in the tough austerity measures of recent years and significant central bank stimulus.
Yet, even before the Brexit vote, economic conditions have been sluggish as leaders at both national and European level struggle to tackle long-term structural problems. As such, while we can anticipate a notable impact on business sentiment in the next quarter we should also be cautious of ascribing all issues across Europe to Brexit: with a range of other factors, such as the developing banking crisis in Italy, worthy of serious consideration.
Global productivity, meanwhile, remains a significant on-going concern. Slowing emerging markets have made the hard won gains of recent decades fade into distant memory. While, in developed economies, we are yet to see the technological revolutions which have been so transformative in IT and the media make an impact on productivity in the significantly larger service sectors of retail, government and healthcare.
Nonetheless, given the anticipation that a negotiation of the UK’s departure from the EU could take years, the findings of GECS indicate that political leaders will have to find ways to bolster confidence and reassure businesses if we are to continue to see causes for economic optimism.