A new relationship between confidence and growth? “It’s confidence, but not as we know it”.


Economic confidence remains resilient…

The 10th EY Capital Confidence Barometer published on April 7th, based on a survey of over 1,600 executives worldwide, clearly demonstrates that business economic confidence is both strong and resilient, and has not been impacted significantly by economic and political shocks in the 6 months since the last survey. Fully 90% of respondents felt that the global economy was either improving or stable, compared to 89% in October 2013. There was a slight fall in those choosing Improving, down from 65% to 60%, but given recent shocks to the world economy, these results indicate that confidence is now well established and resilient to short-term shocks – certainly the mood is very different to the one at the height of the Eurozone crisis.

…and financial confidence has improved…

Even more strikingly, business confidence on key financial indicators has improved significantly over the last 6 months: 64% of businesses are confident about future earnings compared to 43% six months ago and there has been an increase of 21% in the number of businesses confident about valuations, now up to 50%. The results for financial indicators are the highest for several years and suggest that businesses now perceive the recovery to be broadening out and sustainable.

…but attitudes to growth remain cautious…

But global business leaders are not planning a major push for growth despite these high levels of confidence. When probed on their growth ambitions, the picture that emerges is of a cautious approach to expansion:

  • The same number of businesses (39%) are prioritising growth as those with a focus on cost reduction and operational improvement, the lowest share for growth since April 2012;
  • Only 29% expect to undertake M&A activity in the next 12 months, down from 35% in October; and
  • Only 30% expect to create jobs compared to 48% in October.


However, there are some positive signs with a clear shift towards more ambitious forms of organic growth: we estimate that 66% of organic activity is likely to be higher risk, a significant increase from 43% in October. Companies are more ambitious about their plan to enter new geographies and 15% identified R&D spending as a priority compared to 6% only 6 months ago. The sense is of businesses recognising the need to take risks to grow but with a desire to ensure this is measured, balanced and appropriate.

…with external influences playing a role…

It is unsurprising given the depth and length of the global financial crisis that business confidence is not translating into a push for rapid expansion but other factors are at play. The CCB identifies that shareholder activism is impacting the boardroom agenda. When asked how shareholder activism had impacted the boardroom agenda, 49% said it had pushed cost reduction higher and 24% identified higher dividend payments and 23% divestments as other areas that had been prioritised as a result. By contrast only 11% suggested it had led to a greater focus on acquisitions. There does appear to be evidence that increased pressure on boards and management has led to a shift towards lower risk activities further dampening the momentum for growth.

…and the risk-reward equation is attracting more attention…

The survey also suggests that business leaders have changed their perspective on the relative attractiveness and riskiness of different regions of the world. Political risk is cited by 32% of respondents as the most significant risk to global growth, just ahead of a slowdown in emerging markets at 29%. Only 12% cite the Eurozone and 7% inflation. Business is more confident that the world is going to grow but also more aware that growth will not be at the rates seen before the financial crisis and that there are risks associated with chasing higher growth.

…so its steady as it goes with a shift to quality and impact.

Business leaders globally are confident about the economic outlook but this is a different economic outlook than the one that formed the basis of accepted wisdom before the financial crisis. Today’s business leaders are basing their plans around a global economy that is expected to grow more slowly than the pre-crisis trend, with growth more balanced between developed and developing markets and with greater volatility. They also have a greater awareness of risk and recognise the need to balance risk and return. The result is a more measured and conservative approach to expansion than the high levels of confidence would suggest: capital will be allocated between various uses based on a more considered analysis of the benefits and risks.

The CCB suggests a greater allocation of resources to organic growth and margin improvement than in the boom period, and a more balanced geographic portfolio with an increased allocation of capital to developed markets. Most strikingly as identified by EY’s Global Transactions leader, Pip McCrostie, deal making will be concentrated on larger, high quality strategic deals with the capability to transform business prospects. We are entering a new era.


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