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As business confidence stabilises, companies are looking for additional ways of containing and reducing overheads while also driving growth.
The latest Regus Business Confidence Index, based on over 16,000 interviews across the world, shows business confidence levels stabilising, after experiencing a significant fall in the previous edition (September 2011). Surprisingly, confidence has increased more in counties that were initially hit hardest by the downturn, suggesting that reform and/or economic stimulus measures may be having a beneficial effect. Globally, the proportion of companies reporting revenue growth remains unchanged on six months ago while a slight squeeze on profits is revealed. Mindful of the need to contain costs in the quest for sustainable growth, companies are looking for ways of capping overheads without reducing their competitive advantage. This latest edition of the Regus Business Confidence Index reveals that lack of access to capital, inflexible office overheads and high/inflexible distribution costs have contributed most to corporate distress over the last few years. In order to reduce costs without damaging growth prospects, companies worldwide are prioritising shortening supply chains, reducing fixed office costs with more flexible arrangements and increasing use of cloud IT applications as their key initiatives.
Regus Business Confidence Index | Walking the Tightrope | Issue 6 | April 2012 | Page 2
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Introduction
At the start of 2012, the world economic outlook remains uncertain as the Eurozone crisis continues to affect global markets. Consumer confidence in India and China remains high according to Nielsen1 although emerging economies are expected to be affected by slower internal demand during 2012.2 In order to provide a backdrop for this latest edition of the Regus Business Confidence Index, it is necessary to paint a picture of current financial and economic indicators around the world, which show the measures being taken by government and central banks to support economic growth in their country or region. Seen in the light of these supportive measures, readers may choose to conclude that the stabilisation of business confidence revealed in this report is evidence of their success.
Consumer confidence in India and China remains high
The IMF confirms this outlook predicting that the Eurozone economy will enter a mild recession in 2012 due to the rise in sovereign yields, the effects of bank deleveraging, and the impact of further fiscal consolidation. In particular, Eurozone funding contracted to such an extent that the European Central Bank (ECB) offered a three-year Long-Term Refinancing Operation (LTRO) lending 529.5 billion ($712.81 billion) to 800 lenders in March 2012 in addition to the 489.2 billion dispensed in late December 2011 to 523 banks.3 In the UK alone in 2011, the Office of National Statistics reports that businesses spent the lowest amount since 1993 in acquiring other businesses indicating that lack of access to finance still weighs heavily on their prospects.4 In the USA, however, the IMF reports an unexpectedly positive trend in business capital investment and a strengthening of consumption as consumers reduced their savings rates. The National Federation of Independent Business also predicts a possible increase in domestic demand as businesses plan to rebuild stock after fully 56 months of inventory liquidation.5 In spite of this increasingly rosy picture, the IMF shows concern about any decrease in stimulus spending.6
1 2 3 4 5 6
Nielsen, Consumer confidence, concerns and spending intentions around the world, Q4 2011 The IMF, World Economic Outlook Update, 24th January 2012 The Wall Street Journal, ECB gives banks a big dollop of cash, 1st March 2012 The Guardian, UKplc shuns domestic acquisitions as business confidence falls, 6th March 2012 Reuters, Small business confidence at year high in February, 13th March 2012 The IMF, World Economic Outlook Update, 24th January 2012
Regus Business Confidence Index | Walking the Tightrope | Issue 6 | April 2012 | Page 5
Introduction
Further dampening of foreign trade activity will be caused by weak world demand
In emerging BRIC economies growth has also slowed slightly and in China in particular higher interest rates and contracted private sector credit have affected housing investment and foreign trade. Further dampening of foreign trade activity will be caused by weak world demand. As a result the OECD predicts a muted real GDP growth for China in 2012.7 Similarly in India volatility in global markets and particularly disquiet in Europe reduced inflow of foreign capital in the past year.8 On the other hand in Brazil, although growth has slowed down, natural oil and gas reserves, plus increasing domestic demand, place the country in a position to potentially overtake the UK as the worlds sixth largest economy.9 The Brazilian economy, now reportedly worth $2.5tn, is reported by the Instituto Brasileiro de Geografia de Estatistica to have grown in the fourth quarter last year by 0.3% on the previous quarter.10 In the UK on the other hand, where unemployment rose by 28,000 to 2.67 million in the three months to January 2012,11 the Office for Budgetary Responsibility (OBR) predicts a further rise in unemployment levels.12 A joint report by the IMF and the OECD reveals that the UK is currently one of the weakest economies in the G20, although a ray of hope was cast by approval in Brussels of the National Loan Guarantee Scheme; a 20 billion programme aimed at increasing lending to small businesses.13 It is felt that the Eurozone is heavily affecting the UKs economic prospects although within Europe prospects are mixed. On the one hand French statistical agency Insee reports that in the last quarter 2011 the French economy grew 0.2% (a contraction had been predicted),14 while Germany, so far representing a bullish exception in Europe, actually experienced a decrease in export levels and slower domestic consumption.15
7 8 9 10 11 12 13 14 15
OECD, China Economic forecast, November 2011 Business Today, Euro Crisis to keep Indian markets volatile: Economic survey, 15th March 2012 BBC News, Brazil Overtakes UKs economy, 6th March 2012 Blottr, Brazil economy slows down and grows 2.7% in 2011, 6th March 2011 BBC News, UK unemployment rises by 28,000 and reaches 2.67m, ONS reports, 14th March 2012 The Guardian, Budget 2012: the OBR predictions for the UK economy, 21st March 2012 Daily Mail, Britain is among the worst performing economies in G20, says grim report, 15th March 2012 The China Post, Frances economy grew 1.7 percent in 11, 16th February 2012 The Irish Times, Sagging exports hit German economy, 24th February 2012
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16
The Wall Street Journal, The dreary Dutch economy in 2012, 23rd February 2012
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Growth expectations
As governments try to provide long-term solutions to Eurozone instability, it seems that global business confidence is finally stabilizing with the proportion of companies reporting revenue and profit growth largely similar to that reported six months ago.
The majority of major world economies report stable or unaltered revenue growth with Mexico, the UK and the USA reporting the greatest positive variation. In spite of this upturn, countries where the largest proportion of companies report revenue growth remain Germany, and emerging economies Brazil, India and China. Canada where companies reporting revenue growth remain stable may expect significant improvement of conditions in the future as Canadian commercial lending reportedly increased for the fifth time in the last quarter 2011 and reached its highest level since 2009.16
September 2011
16
The Wall Street Journal, The dreary Dutch economy in 2012, 23rd February 2012
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Growth expectations
Companies reporting profit growth have decreased slightly since September 2011 with a near stall in China, South Africa and Belgium and a decline in Brazil. This contrasts sharply with the positive portrait revealed by Mexico where the largest increase in companies reporting both profit and revenue growth is found. The UK and the USA confirm that they have ground for an increase in confidence with more companies having increased their profits in the past six months. Japan, Germany and the Netherlands report a double digit drop. The Dutch economy is in fact expected by the European commission to contract 0.9% in 2012 mainly due to high household debt.17
September 2011
17
Reuters, Canadian business borrowing heats up in Q4- Pay Net, 15th March 2012
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Regus Business Confidence Index | Walking the Tightrope | Issue 6 | April 2012 | Page 10
Brazil India Germany China S, Africa Australia Global Average Canada Mexico USA Belgium France UK Netherlands Japan 0 20 40 60 80 100 120 140 160
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Top three ways to save cost without damaging growth Shorter supply chain Reducing fixed workspace More cloud IT applications
On a country by country basis, a shorter supply chain was identified as a key cost saving area by more French (49%), Chinese (47%)and UK (45%) companies than average with only just over a quarter (26%) of Japanese companies highlighting this as an effective measure. Japanese companies are, however, more likely than average to identify IT cloud applications as ideal cost reducing initiatives (43%). Businesses in the Netherlands (49%) and South Africa (45%) are particularly concerned with the reduction of fixed workspace costs, a concern shared by only a quarter (25%) of Chinese companies.
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37.5
25.0
12.5
China
Mexico
Belgium
Canada
Netherlands
S.Africa
Australia
USA
UK
France
Germany
Global Average
Respondents were also asked to identify what they felt had been the main factors contributing to corporate distress during the downturn. In particular, access to cost effective capital was identified by almost half of respondents (47%). Fully 58% of companies in the USA and India report that access to capital was a major difficulty in the downturn as do 56% of Chinese businesses and 55% of UK respondents. Only in Germany (28%) less than a third of respondents identified difficult lending conditions as a hindrance. In the UK in particular, the Federation of Small Businesses (FSB) has been active voicing concerns over lack of lending to smaller firms. An FSB survey released in February 2012 reveals that in the UK between 2007 and 2010 there was a 24% fall in successful small business loan applications compared with only 9% in Germany and calls for public investor accounts and asset-backed lending to be brought into the 1bn Business Finance Partnership. As small businesses account for around 70% of employment in the USA and China it is no wonder that they are to be seen as a major engine of economic growth.18 Fortunately, in the USA the Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, reports that lending to small firms grew 18 per cent in January year on year. In China in February 2012 the Peoples Bank of China said it would cut its high reserve requirement by 0.5% to help increase lending.19
18 19
Empowering SMEs Worldwide: The Alibaba Story, Brian A. Wong, May 2008; http://www.asiapacificforum.com/sub/sub_news/ns_20100318_smes.html CNN, China eases bank restriction to boost growth, 20th February 2012
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Japan
India
Brazil
0.0
60
50
40
30
20
10
USA
Australia
India
China
UK
S.Africa
Global Average
Mexico
Belgium
Canada
Brazil
France
Netherlands
Japan
Other reasons for corporate distress were the cost of unnecessary office space, a concern that is confirmed in identifying the reduction of fixed office space with an area for cost saving. In particular Indian, Canadian and Brazilian companies felt that being bound to unnecessary office space was detrimental to them during the downturn. By contrast Belgian and French companies were the less affected by unnecessary workspace costs and more concerned about inflexible margins paid to distributors or resellers and introducers in the economic slowdown than average. Businesses were also asked to identify the initiatives that they believed would be most likely to contribute to economic stability in the future creating a solid ground for growth. In particular, businesses identified a wider distribution of customers as the best initiative to provide stability. This complements previous reports that the majority of firms globally are looking to expand abroad in the next few years.20 Predictably emerging economies are more likely to venture abroad in their dynamic quest for growth, while businesses in the Netherlands, Canada and France appear to be more confident in their existing markets.
20
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Germany
Flexible workspace
Felxibility also featured prominently both in terms of conditions for staff and in terms of location, further confirming that during the slowdown global business learnt to shy away from lengthy fixed arrangements and is opting to remain nimble to achieve growth. Brazilian companies are particularly keen to opt for flexible workspace, followed by companies in the Netherlands and Germany while flexibility for employees is particularly sought out by companies in France and Japan.
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Large Business
Medium Business
Small Business
20 September 2011
40
60 March 2012
80
100
120
140
Some interesting differences arise between small and large businesses best cost saving strategies with large firms clearly opting for shortening the supply chain, reducing fixed office space and an increasing use of IT cloud applications. Smaller businesses instead put an increased use of pay-as-you-go business services at the top of their cost saving measures followed by another flexibility enhancing initiative such as reducing fixed workspace. A positive sign of the intentions to grow expressed by smaller firms is the preference for economising by increasing sales through third parties.
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Small and large businesses also differ in their identification of the main causes of distress during the downturn with large businesses indicating that flexible margins due to resellers, distributors or introducers had weighed heavily on their firms, less so for small companies which instead found that access to capital was very difficult. Difficulties accessing capital is rated as the third greatest cause for duress by large businesses that rate making permanent staff redundant as second greatest cause for distress in the slowdown. Small businesses on the other hand report that paying for unnecessary office space was the second greatest difficulty felt during the downturn.
Main reasons for distress during world economic slowdown Inflexible margins paid to distributors/ resellers/introducers Access to cost effective capital Paying for unnecessary office space Making permanent staff redundant
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Initiatives most likely to contribute to stable and sustainable growth Wider distribution of customers More flexible working conditions for staff Flexible workspace More remote working Reducing non-core activity/functions performed in-house A higher proportion of part-time and freelance staff
32%
21%
18%
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Regus Business Confidence Index | Walking the Tightrope | Issue 6 | April 2012 | Page 19
Country
Revenue rise
Profits rise
UK USA France Germany China India Belgium Netherlands Brazil South Africa Japan Australia Canada
Mexico
43% 48% 49% 62% 67% 69% 53% 39% 71% 43% 18% 46% 51%
50%
36% 40% 34% 51% 56% 58% 38% 28% 57% 39% 13% 40% 40%
37%
45% 35% 49% 44% 47% 39% 43% 41% 33% 40% 26% 39% 41% 43%
41% 42% 41% 32% 25% 40% 44% 49% 40% 45% 29% 37% 40%
39%
37% 44% 36% 37% 33% 36% 43% 43% 44% 35% 43% 43% 31%
38%
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Conclusion
After plummeting significantly between March and September 2011 on the back of stock market and Eurozone crises, business confidence seems to have arrested its fall and to be stabilising once more.
It would appear that business believes that it has experienced the larger part of economic slowdown and is now determined to proactively climb back to growth. Although consumer confidence is still low in the UK where high levels of unemployment have affected consumer outlook,21 it is rising in China, in Canada and the USA where outlook continues to improve in spite of rising gasoline prices.22 These are hopeful signs for businesses that the market is stabilising and laying more solid foundations for growth in the months to come. Perhaps the most positive indicator is that, surprisingly, business confidence has increased more in countries that were initially hit hardest by the downturn (such as the USA and the UK). Businesses across the world want to grasp the growth possibilities of a recovering global economy, while also continuing to contain, or even reduce, costs. To do so, there is an evident interest in reaching a level of flexibility that best favours future growth with a particular emphasis on creating shorter supply chains and introducing more flexible ways of working. In particular, businesses report that inflexible property arrangements were a hindrance to them during the downturn while increased flexibility for staff and making less use of fixed office space will help provide the stability necessary to pursue future growth. With solutions readily available on the market for flexible workspace arrangements there is no doubt that the number of businesses benefiting from more nimble and scalable arrangements will increase in the coming years.
21 22
The Telegraph, Consumer confidence dented by job fears, 23rd February 2012 USA Today, Consumer confidence rises despite higher gas prices, 28th February 2012; China Daily, Chinese confidence rebounds, 12th March 2012
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About Regus
Regus is the worlds largest provider of flexible workplaces, with products and services ranging from fully equipped offices to professional meeting rooms, business lounges and the worlds largest network of video communication studios. Regus enables people to work their way, whether its from home, on the road or from an office.
Customers such as Google, GlaxoSmithKline, and Nokia join hundreds of thousands of growing small and medium businesses that benefit from outsourcing their office and workplace needs to Regus, allowing them to focus on their core activities. Over 1,000,000 customers a day benefit from Regus facilities spread across a global footprint of 1,200 locations in 550 cities and 95 countries, which allow individuals and companies to work wherever, however and whenever they want to. Regus was founded in Brussels, Belgium in 1989, is headquartered in Luxembourg and listed on the London Stock Exchange. For more information please visit: www.regus.com
Methodology
Over 16,000 business respondents from the Regus global contacts database were interviewed during January 2012. The Regus global contacts database of over 1 million business-people worldwide is highly representative of senior managers and owners in business across the globe. Respondents were asked about their recent revenue and profit trends, along with their future views on a number of issues including the measures they regarded as most effective for companies to reduce costs without damaging growth. The survey was managed and administered by the independent organisation, MindMetre, www.mindmetre.com
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Whilst every effort has been taken to verify the accuracy of this information, Regus cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report.