The virtuous cycle of optimism, innovation and trade
I was interviewed last week on CNN to discuss the continued strength of global business optimism uncovered by our Q2 IBR economic update. The interviewer was particularly interested in the reasons behind business confidence around the world reaching a record high since we started asking this question in 2003. So let’s take a look at what the survey is telling us.
While confidence is fairly strong across the globe, it’s advanced economies that are leading the way. Business optimism in North America reached 73% in Q2, its highest level since 2004; the European Union posted 43%, its highest since 2006, and a further signal that the region is starting to move beyond the sovereign debt crisis. The UK (80%) and Germany (79%) are particularly bullish about growth prospects. Overall, the G7 group of leading economies posted business optimism of 53%, another all-time high.
Confidence in emerging markets is slightly more subdued: net 36% of BRIC economy businesses are optimistic about the outlook over the next 12 months. Businesses in China (30%) remain circumspect about the growth trajectory of the economy. However, there were some good news stories here too with India (86%) climbing to the top of the global optimism rankings following the election of Narendra Modi, and South Africa (35%) bouncing back following a raft of poor economic data and continuing strikes.
Looking at the drivers behind this surge in optimism, it appears business leaders are particularly confident about their ability to sell internationally. Globally, 24% of businesses expect to increase exports over the next 12 months, again the highest level on record. Global trade disappointed slightly in the first quarter of this year but business leaders are bullish on exports increasing going forward in most countries, including Australia, Canada, China, Germany, Italy, Spain, Greece, the UK and US, to name just a few. This is further evidence that mid-sized businesses around the world are becoming more global, increasing their operations outside their country borders and focusing on accessing new sources of demand.
The results also tell us that companies are planning to ramp up spending on research and development (R&D). Perhaps as they are trying to compete on a global scale, business leaders want to invest in R&D to make their companies competitive for the long-term, adapting their products and services to consumer tastes in new markets. While I recognise that many companies are still struggling and there are concerns about the availability of cash, higher R&D expenditures would be a positive development for the global economy overall. I am hoping to see higher optimism, more innovation and increased trade become a virtuous cycle.