The Duke University/CFO Global Business Outlook survey for the second quarter of 2014 reveals a global business environment still in a state of transition. Optimism for the year ahead appears to be staging a comeback in the United States, but executives in Asia and in Europe have begun sending out mixed signals, while the outlook in Latin America continues to trend downward.
Each quarter, the Duke University Fuqua School of Business and CFO Publishing conduct a survey among finance executives around the world to gauge their views on the states of their economies and their businesses. This quarter, we collected responses from 405 CFOs and other executives at U.S. companies of all sizes, and from 438 executives from countries in Europe, Asia, Latin America, and Africa.
CFO optimism about the U.S. economy continues to build slowly but steadily. The Global Business Outlook survey asks finance executives to use a scale from 0 to 100 to rate the prospects for their local economies and for their own companies over the next 12 months. In the second-quarter survey for 2014, the U.S. economic optimism rating rose to 61.1 out of 100, hitting a level rarely seen since 2007. The confidence of U.S. finance executives in their own companies has also bounced back, coming in at 67.1 following last quarter’s dip to 64.
This level of optimism on the part of U.S. CFOs appears to be bucking the trend seen elsewhere. In every other region, executive optimism about their own companies is heading downward from the previous quarter. The decline is moderate in Japan, but steeper in the emerging economies in Asia. In both cases, however, optimism about their respective economies — as opposed to their companies — has actually improved since last quarter. The corporate leaders in these countries may still be sorting out the best courses of action to take as relationships between businesses, governments, and trading partners continue to evolve.
Meanwhile, in Europe it appears that a divide is opening up between the optimists and the pessimists. Average (mean) ratings both for the economy (53.5) and for companies (58.6) fell back from the levels we saw at the beginning of the year. At the same time, the median score for economic outlook remained unchanged since last quarter, hovering at 60, and more than half of the Europeans (53 percent) said that they felt more optimistic about their respective countries’ economies.
It seems likely that some European companies, battered by recession and austerity programs, are having deeper doubts about their ability to cope. The most pessimism is found in the banking/financial services and mining/construction sectors, dragging down the average score for economic optimism. Other companies feel better prepared to regroup and take what advantage they can from weakly improving economies — especially in the retail industry, hinting at hopes for a renewal of consumer demand.
Signs of hope are even harder to discern in Latin America. One year ago, Latin American CFOs were the most optimistic in the world. In a dramatic turnaround, the Latin American optimism index has fallen to 53 out of 100.
Overall, a little more than half of the executives from this region say they are less optimistic about their countries’ economies this quarter than last. The outlook is particularly gloomy in Brazil, where more than 90 percent of the respondents are worried about the effects of government policies and economic uncertainty on their companies. Nearly all the executives from Brazil (94 percent) say that inflation remains a concern, and 85 percent expect labor unrest to affect the country’s economy sometime within the next 12 months.
To Spend or Not to Spend?
For some companies, their increasing confidence in improved economic conditions is starting to translate into movement in their cash reserves. Many companies will accumulate cash when they feel they have to, and spend it again when they are feeling more confident. In the middle of changing times, however, it may be difficult to discern exactly when that turning point is reached.
U.S. firms, for example, are evenly split on whether they will begin to deploy cash reserves this year or will continue to hold their cash tightly. A little less than 40 percent of U.S. respondents take each position, with the remainder still unsure which way they will go. European firms show a similar equanimity, splitting almost precisely into thirds between spending accumulated cash, retaining it and still deciding what they will do.
On the plus side, the U.S. companies that expect to start spending down their reserves are primarily looking to invest in their own growth. By far, the most common use of cash will be for capital spending and investment (63 percent). Acquisitions are a distant second, garnering 29 percent of respondents, and paying down debt is third, at 26 percent.
This trend holds true in other regions, as well, regardless of where a company is located. If companies are going to dip into their cash reserves, they are most likely to be redeploying the cash into capital spending and investment.
Beyond that, Asian firms are more likely than either their U.S. or European peers to use cash for hiring and for marketing, fueling their more aggressive growth. In fact, the most ambitious spenders are in Asia; executives there are more than twice as likely to say that they plan to spend some of their accumulated cash than to say they will on hang onto it.
Oddly enough, in the troubled region of Latin America, spenders also outnumber savers by about two-to-one. Slightly more than half of the executives (53 percent) say they will start using their cash reserves, and half of these companies intend to direct the cash towards capital spending and investment, as in other regions.
However, the other uses to which Latin American companies expect to put their cash holdings reveal some stark differences from other regions. Latin American companies are more likely than firms from any other region — even the Europeans — to be paying down debt and covering operating losses, for example, and virtually none of the Latin American respondents expects to be able to boost hiring.
Every region has its share of reluctant spenders, of course, but for different reasons. In the U.S. and Asia, where the economic outlook is more positive, executives are more likely to say that they won’t need to use cash to fund their businesses. Responses from Europe and Latin America, on the other hand, reflect the uncertainty dogging those regions. There, companies holding onto their cash are most likely to be doing so either to retain it as a buffer against uncertainty, or because they simply don’t have excess cash to spend. These companies will continue to keep a close eye on their cash positions, and we will continue to keep a close eye on their responses to an uncertain future.