IAFEI and a group of partners including Duke University and Grenoble EM survey CFOs across the world for the third quarter 2018, the survey was running from August 22 to September 6, 2018.
The Optimism Index about the US economy declined to 70 this quarter, compared to an all-time high of 71 last quarter, on a 100-point scale. CFO optimism about their own firms’ financial prospects increased to 71.4, the highest level since 2007. The survey’s CFO Optimism Index is an accurate predictor of future hiring and overall GDP growth.
Optimism in Europe plummeted to 58 this quarter, down from 68 last quarter. Optimism is about 50 in the UK, Italy, and Spain, while optimism remains 60 or higher in France, Germany, and the Netherlands. Capital spending and employment are both expected to grow about 2% over the next year. The top concern among European CFOs remains attracting and retaining qualified employees, edging out economic uncertainty and regulatory and government policies. Among firms that list hiring challenges as a concern, 52% of European companies indicate they have increased wages to attract and retain workers, 34% have increased HR budgets, and 17% have increased vacation and flex hours. In contrast, 42% of companies say they have not made any changes to attract and retain employees. European firms adversely affected by the trade situation expect to reduce employment and capital spending by 4%.
Optimism in Asia held steady at 60 this quarter. More than half of Asian CFOs listed economic uncertainty as a top concern. Other concerns include employee productivity, difficulty attracting qualified employees, and rising wages. Capital spending is expected to grow about 5%, and employment 3%, over the next 12 months. Among Asian firms that list difficulty hiring as a top four concern, 65% indicate that they have increased wages to attract and retain workers, 45% are targeting new groups of workers (such as retirees), 39% have increased HR budgets, and 34% have increased vacation and flex hours. Asian companies adversely affected by trade wars will grow capital spending more slowly and reduce their number of employees.
Overall, Latin American optimism is 56 this quarter, on a scale of 0 to 100. The Optimism Index is 70 in Mexico, 64 in Chile, 62 in Peru, 52 in Brazil, and only 37 in Ecuador. Economic uncertainty is the top concern among Latin American CFOs, with 65% of firms listing it as a top-four concern. Other concerns include government policies, currency risk, and weak demand. Capital spending is expected to grow 1.4% and employment 2.6% over the next year. Among Latin American firms that have been adversely affected by trade wars with the US, employment is expected to increase 0.8% over the next year.
Compared to other regions, few Latin American companies indicate that they are taking specific steps to attract and retain workers, with 43% saying they have not adopted any new strategies. Twenty-nine% indicate that they have increased wages to attract employees. Nearly two-thirds of firms in Peru say that recent judicial corruption cases will lead their firms to slow down and/or reduce investment.
Business optimism in South Africa fell to 38 this quarter, down from 51 last quarter. Nigerian optimism fell to 48 from 54. Employment should fall about one% in South Africa and increase about one% in Nigeria over the next 12 months. Median capital spending will remain flat in South Africa, and increase nearly 10% in Nigeria. African CFOs are most concerned about governmental policies, economic uncertainty, weak demand, currency risk, and access to capital. Among African firms adversely affected by trade wars, employment is expected to fall by 5%. Forty-one% of African firms have increased wages to attract and retain workers.
GDP-weighted average global business outlook
Tight labour market is a top concern
In the United States, the proportion of firms indicating they are having difficulty hiring and retaining qualified employees remains near a two-decade high, with 41% of CFOs calling it a top concern. The typical US firm says it plans to increase employment by a median 3% in 2018 and expects wages to increase 4% on average. The tight labor market continues to put upward pressure on wages and wage inflation is now a top five concern of US CFOs.
Employees are willing to leave their jobs for greener pastures. Over the past 12 months, American CFOs report they had to replace 14% of their workforces, compared to 13% turnover in 2016.
Among companies that list hiring as a top concern, 56% say they have increased salaries to improve their chances of hiring and retaining workers; 31% say they have increased HR budgets to better advertise positions; 29% have increased vacation or flex hours; and 21% improved health care benefits.
Wage growth should be strongest in the tech, transportation, and service/consulting industries. US companies expect the prices of their products to increase by more than 3% over the next year.
Fast pace of change shortens planning horizon
The fast pace of technological change and the economic environment is hampering the ability of companies to plan for the future.
US firms indicate that five years ago they could effectively plan 3.5 years into the future. In the current environment, they say they can only plan 2.3 years out. Coincident with this shorter planning horizon, CFOs indicate the projects they adopt now have an expected life of 4.6 years, compared to a 6.2-year life for projects they initiated five years ago. Some CFOs said they would hesitate to buy a machine that will likely be obsolete within a few years. If companies hold off on investing because of the fast pace of change, with new investment becoming obsolete quickly, this may damage long-run growth prospects for the overall economy.
This accelerated obsolescence is on top of widespread concern that pressure to hit quarterly earnings targets leads to short-termism among public companies. The survey found the shortening of planning horizons is even more severe among private firms than public companies.
Other regions of the world have experienced similar or greater reductions in the planning horizon compared to the 1.2 year reduction in the US Over the past five years, the planning horizon has fallen by 3 years in Africa, by 1.3 years in Europe and Latin America, and by 1.2 years in Asia.
US companies are evenly split about the effects of ongoing tariffs and trade wars. Firms that say they have been negatively affected plan to reduce their capital spending by 6% due to tariffs and trade wars, compared to a 5.7% increase averaged across all firms.
The trade situation is also negatively affecting companies elsewhere in the world. African, Asian, and European firms adversely affected by the trade situation say they expect to lay off employees in response.
Table 1: During the past quarter, which items have been the most pressing concerns for your company’s top management team?
**Table 2: Relative to the previous 12 months, what will be your company’s PERCENTAGE CHANGE during the next 12 months? (mean by region)
About the survey: This is the 90th consecutive quarter the Duke University/CFO Global Business Outlook survey has been conducted. The survey concluded September 7, and generated responses from more than 800 CFOs, including nearly 260 from North America, 65 from Asia, 128 from Europe, 352 from Latin America and 41 from Africa. CFO survey: With hiring a top concern, firms increase salaries