Global economic conditions survey report:Q3, 2019About ACCA ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants, offering business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. ACCA supports its 219,000 members and 527,000 students (including affiliates) in 179 countries, helping them to develop successful careers in accounting and business, with the skills required by employers. ACCA works through a network of 110 offices and centres and 7,571 Approved Employers worldwide, and 328 approved learning providers who provide high standards of learning and development. Through its public interest remit, ACCA promotes appropriate regulation of accounting and conducts relevant research to ensure accountancy continues to grow in reputation and influence.ACCA has introduced major innovations to its flagship qualification to ensure its members and future members continue to be the most valued, up to date and sought-after accountancy professionals globally. Founded in 1904, ACCA has consistently held unique core values: opportunity, diversity, innovation, integrity and accountability. More information is here: accaglobalAbout IMA®(Institute of Management Accountants)IMA®, named the 2017 and 2018 Professional Body of the Year by The Accountant/International Accounting Bulletin, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession. Globally, IMA supports the profession through research, the CMA®(Certified Management Accountant) and CSCA®(Certified in Strategy and Competitive Analysis) programs, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global network of more than 125,000 members in 150 countries and 300 professional and student chapters. Headquartered in Montvale, N.J., USA, IMA provides localized services through its four global regions: The Americas, Asia/Pacific, Europe, and Middle East/India. For more information about IMA, please visit:imanetThe Global Economic Conditions Survey (GECS), carried out jointly by ACCA (the Association of Chartered Certified Accountants) and IMA (the Institute of Management Accountants), is the largest regular economic survey of accountants around the world, in terms of both the number of respondents and the range of economic variables it monitors. Its main indices are good predictors of GDP growth in themed countries and its daily trend deviations correlate well with the VIX, or fear index, which measures expected stock price volatility.Fieldwork for the Q3 2019 survey took place between 30th August and 13th September 2019 and attracted 1128 responses from ACCA and IMA members, including over 100 CFOs.ACCA and IMA would like to thank all members who took the time to respond to the survey. It is their first-hand insights into the fortunes of companies around the world that make GECS a trusted barometer for the global economy.IntroductionThe Global Economic Conditions Survey (GECS) is the largest regular economic survey of accountants in the world.3The GECS global confidence index fell to its lowest level in almost eight years in Q3. But the global orders index, which tends to be less volatile than confidence, was unchanged over the quarter, remaining at the lowest level since Q3 2016. Both employment and investment intentions declined at the global level this quarter adding to the slowdown message. Along with other indicators, the message from the GECS is one of an intensifying global slowdown into 2020. Risks are on the downside but a global recession is still unlikely, given the strength of the jobs market in many developed economies. Meanwhile, concern about rising operating costs fell for the fifth quarter in a row in Q3 to 42%, the lowest level in two and a half years. An easing of inflationary pressures is to be expected during a period of below-trend economic growth. Inflation in developed economies is now below 2%, creating room for the monetary ease already enacted by the US Federal Reserve and European Central Bank (ECB). Meanwhile, the possibility that their suppliers could go out of business was a worry for just 11% of respondents, up slightly from 9% in the previous survey. The proportion concerned about customers going out of business increased to 24%, up from 17% last time. While too early to call a trend, this is nevertheless the highest level of concern in five years. Looking at the regional breakdown of confidence, the biggest falls this quarter were in Asia Pacific and South Asia. Both China and India are experiencing slowing growth that is undermining confidence in their respective regions. In the US and UK, confidence did increase slightly. But both countries saw big falls in confidence in Q2 and confidence is at low levels. All the key regions recorded a negative Executive summary Confidence across regions converged at low levels this quarter and the global index is at an eight-year low.4Chart 1: Global confidence falls to a record low, risks to the world economy increaseSource: ACCA/IMA, OECD-40-30-20-100102.02.53.03.54.04.5GECS index: global confidence World GDP (G20) Growth % yy (RHS)2011 2012 2013 2015 2016 2017 20182014Chart 2: Global cost concerns easing42%of survey respondents cited concern about rising operating costs, the lowest level in two and a half yearsSource: ACCA/IMA30354045505560Q1 2012 Q3 2013 Q1 2015 Q1 2018 Q3 2019Q3 2016GECS: index of concern about rising costs2019Chart 3: Confidence falls almost everywhere100-10-20-30-40-50-60Asia Pacific C 30% tariffs on all is 30% on all US (non-commodity) imports from China with reciprocal tariffs on Chinas US imports. Uncertainty is the effect of a 50bps incraese in investment risk premia in all countries. The US-China trade war could knock between 1% and 1.5% off both US and Chinese GDP growth spread over three years.But tariffs at 25% or even 30% will have a significant impact tariffs at this level are highly unlikely to be absorbed elsewhere. Moreover, these tariffs are to be implemented mainly on consumer goods, such as toys and electronics. This implies a more immediate and significant upward influence on consumer prices and so a rapid impact on real incomes and spending. Anticipation of reduced future demand may also result in weaker investment spending. According to the OECD, these “direct” effects are estimated to reduce growth in the US by a total of 0.9 percentage points, spread over three years. The effect on the growth rate in China is slightly greater at 1%, but, of course, the Chinese economy has a trend growth rate higher than that of the US even after the recent structural slowdown. The key point here is that in neither case is the impact sufficient to bring the economy close to recession, given their current projected growth rates.The uncertainty factor But that is not the end of the story. The trade war is shrouded in uncertainty as to its ultimate resolution and there are increasing fears of an escalation. In addition, there is the issue of technology transfer between the US and China, encapsulated in the controversy surrounding Huawei. More recently, the designation of China by the US as a currency manipulator (triggered by the fall in the Chinese Yuan to below seven to the US dollar) has added a further element to US-China tensions. Together, these factors could potentially undermine business confidence, tighten financial conditions and provide a major additional transmission mechanism for a more broad-based negative effect on the global economy. So far, financial conditions have not tightened to any significant degree: for example, corporate bond spreads (the excess of corporate borrowing costs over the risk-free, government borrowing interest rate) remain at low levels (see chart). Stock markets also do not suggest Global economic conditions survey report: Q3, 2019 7a dominant trade war effect. True, equity markets have responded in the short term to news on trade war developments. But by early October the US market (S at present the yield curve is negative despite lower short-term interest rates. The US GECS confidence measure actually increased slightly in Q3, one of very few positive changes. But confidence is still at a very low level, close to the all-time low, undermined by the trade war with China and by a slowing global economy. Orders fell further in the third quarter and are now consistent with US growth slowing to an annual rate of between 1% and 1.5% into Chart 10: GECS US orders index points to slowdownSource: ACCA/IMA, US Bureau of Economic Analysis Chart 11: US confidence steadies, orders, employment fall-50-40-30-20-100102030Q42011Q12012Q22012Q32012Q42012Q12013Q22013Q32013Q42013Q12014Q22014Q32014Q42014Q12015Q22015Q32015Q42015Q12016Q22016Q32016Q42016Q12017Q22017Q32017Q42017Q12018Q22018Q32018Q42018Q12019Q22019Q32019Confidence index Capital expenditure index Employment index New orders indexSource: ACCA/IMA2020. (See chart above.) Our view remains that a US recession is highly unlikely, either this year or in 2020. Increased uncertainty and tentative signs of a softer outlook have prompted a 50bps cut in the Federal funds interest rate, effected in July and September. Further easing is likely in coming months with market expectations of another 25bps cut in December. Inflation remains subdued below 2% and is likely to remain so in coming months, despite some upward influence from the effect of tariffs on Chinese imports. The GECS measure of concern about costs increased slightly in Q3 but remains well below its level of a year ago and is consistent with continued low inflation. Orders fell further in the third quarter and are now consistent with US growth slowing to an annual rate of between 1% and 1.5% into 2020.-25-20-15-10-5051015200.00.51.01.52.02.53.03.54.04.5GECS index: US orders+2Q US GDP yy % (RHS)Q3 2012 Q3 2013 Q3 2014 Q3 2016 Q3 2017 Q3 2018 Q3 2019Q3 2015