Global economic conditions survey report:Q4, 2018© The Association of Chartered Certified Accountants, Institute of Management AccountantsJanuary 2019About IMA®IMA®(Institute of Management Accountants), named 2017 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) program, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global network of more than 100,000 members in 140 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: imanetAbout 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 208,000 members and 503,000 students 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 104 offices and centres and more than 7,300 Approved Employers worldwide, who provide high standards of employee 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 is currently introducing 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: accaglobalThe 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 Q4 2018 GECS took place between 23 November and 7 December 2018 and attracted 3,773 responses from ACCA and IMA members around the world, including 302 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. We would also like to thank the following for their time and expertise: Andrew Kenningham, Senior International Economist, Capital Economics Dario Perkins, Managing Director, Global Macro at TS Lombard Claus Vistesen, Chief Eurozone Economist, Pantheon Macroeconomics.IntroductionThe Global Economic Conditions Survey (GECS) is the largest regular economic survey of accountants in the world.3Chart 1: Change in confidence between Q3 and Q4 Source: GECSGlobal economic confidence fell for the third consecutive quarter in Q4 and is now at an all-time low. There are signs of growth beginning to weaken in the worlds three biggest economies: the US, China and the Eurozone. But the global orders balance was little changed in Q4 and remains consistent with overall expansion in the global economy in the first half of 2019. All the key regions recorded a negative confidence score (i.e. there were more people pessimistic about the outlook than optimistic), with the lowest score being recorded in Western Europe and the Caribbean. The most confident (or rather least pessimistic) part of the global economy was again South Asia, followed by Africa and North America. In terms of changes this quarter confidence increased in China and the Middle East but fell back in the US and UK. This pattern of changes was repeated for orders. The strongest headwind for respondents was again rising costs, with 55% citing this as an issue. These concerns may recede in the next quarter, owing to the effects of slowing growth and the fall in oil prices. The possibility of suppliers going out of business was a worry for just 12% of respondents unchanged from Q3. In a reflection of the less upbeat outlook, 47% of respondents globally are considering laying off staff, with just 18% considering taking on new workers. Meanwhile, 39% of respondents are considering scaling back investment in new capital projects, compared with just 16% who are looking to increase investment in new projects. Confidence in the US fell back again in the final quarter of the year and is now at an all-time low. There are signs that domestic demand is starting to slow, owing to a combination of higher interest Executive summary Global economic confidence fell for the third consecutive quarter in Q4 and is now at an all-time low. 420151050-5-10-15-20Middle East China Asia Pacific Global US South Asia UKAfricarates and the waning impact of the recent fiscal stimulus. Higher mortgage interest rates are cooling house building activity for example. But the jobs market remains extremely buoyant which will underpin robust consumer spending in coming months. Despite falling in Q4 the GECS orders balance for the US is still consistent with annualised GDP growth of around 2.5% in the first half of 2019. Recession this year is extremely unlikely. Confidence in the UK also fell sharply by 15 points and is now at a record low. The level of uncertainty surrounding Brexit reached extreme levels and is affecting economic activity and confidence. This is especially so with respect to business investment, which is now on a declining trend. In Q4 the GECS capital expenditure index fell by 17 points to its lowest level in five years. Economic growth this year is extremely difficult to forecast given that a range of Brexit outcomes are all still possible with the UK scheduled to leave the EU on 29th March. Only a disorderly no deal outcome would have the potential to trigger a recession and even this would probably be relatively short-lived offset by a monetary and fiscal policy response. Other outcomes a withdrawal agreement or some delay in the Brexit process are not likely to derail the economy, which has underlying positive momentum. Indeed any reduction in uncertainty may give the economy a boost, especially from a catch up in investment spending. In Western Europe, confidence also fell in Q4 to its lowest level since the final quarter of 2011. This is consistent with recent hard data, which shows the Eurozone economy faltering. Current weakness is partly due to temporary factors such as the cut in car production in Germany due to new emissions standards and more recently the effects of civil disturbance in France. However, other factors, including weaker export demand and uncertainty related to Brexit, are also weighing on prospects. Meanwhile, the European Central Bank ended its quantitative easing programme at the end of last year, withdrawing one form of monetary stimulus. But interest rates are likely to remain very low for the foreseeable future with inflation set to be quiescent in coming months. It is not all bad news, however. Although confidence in China remains subdued, it bounced back in Q4. Growth in China has weakened over the past year due to the lagged effects of monetary tightening and a slowdown in credit growth. But the authorities have recently started to loosen policy, easing reserve requirements on banks and announcing big infrastructure projects for example: this should support growth later this year. Trade tensions between the US and China persist, despite the 90-day delay in tariff increases agreed at the G20 summit last December. Sentiment in China is unlikely to revive significantly until this issue is fully resolved. Global economic conditions survey report: Q4, 2018 5The level of uncertainty surrounding Brexit reached extreme levels and is affecting economic activity and confidence. This is especially so with respect to business investment, which is now on a declining trend.GDP %Annual average Austria Belgium France Germany Greece Ireland Italy Nlands Portugal Spain Sdev19811998 2.2 2.0 2.1 2.1 1.6 4.5 1.8 2.6 3.4 2.7 0.819992018* 1.8 1.7 1.5 1.5 0.1 5.3 0.5 1.7 0.9 2.0 1.3CPI %Annual average Austria Belgium France Germany Greece Ireland Italy Nlands Portugal Spain Sdev19801998 3.1 3.6 4.9 2.8 15.9 6.0 8.1 2.4 11.7 7.6 4.219992018* 1.8 2.0 1.5 1.5 2.1 1.7 1.9 1.9 2.0 2.2 0.2THE EURO THE FIRST AND NEXT 20 YEARSTwenty years ago this month the Euro was launched with the irrevocable locking of exchange rates by its founder members and the assumption by the European Central Bank (ECB) of a single monetary policy. Early in 2002, 12 countries introduced Euro notes and coin, completing the process of creating a European single currency that had been first proposed as long ago as 1970 in the Werner Report. Many analysts doubted that the euro would come into existence or believed that if it did so that it would not survive for very long. They have been proved wrong and the Euro survives after 20 turbulent years of financial crisis, sovereign debt default and severe levels of systemic banking risk. Of all the remarks made by the three Presidents of the ECB over the last 20 years the most significant by far was the one made by Mario Draghi in July 2012 when he said “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” The fact that the head of a major central bank had to provide reassurance that its currency would survive speaks volumes about the existential threat to the euro at that time. But this did mark a turning point for the euro as M Draghis comments went a long way to convince financial markets that the euro was indeed here to stay. Bond yields in some of the periphery countries fell precipitously in the weeks after Mr Draghis statement, having previously increased sharply as fears of Euro break up mounted. But of course survival does not equate to success. The Euro has resulted in economic divergence between its members rather than the convergence it was supposed to deliver. (Economic convergence is the tendency for the business cycles of economies to move together, to be correlated.) A one-size fits all monetary policy conducted by the ECB resulted in much lower interest rates in many periphery economies, much lower than was appropriate for their domestic economies. This resulted in booming economies, often fuelled by red hot housing markets (Ireland and Spain being prime examples of this).Rapid economic growth led to higher inflation and a loss of competitiveness. Inevitably these booms led to busts, greatly exacerbated by the financial crisis of 2007/08. This cruelly exposed the lack of flexibility in a monetary union comprised of greatly varying economies. With no exchange rate or interest rate to ease adjustment and fiscal policy constrained also by rules limiting budget deficits, there was only one method for these economies to restore lost competitiveness deflate demand. The consequent austerity and severe recession only served to push debt to extreme levels, raising fears of sovereign default and even countries leaving the Euro in order to be free from the single currency economic straitjacket. Cue M. Draghis commitment in 2012. So the Euro has indeed survived. But it has produced economic divergence not the convergence required to cement a permanent monetary union. One way of illustrating this is by comparing the dispersion of growth between the euro-zone economies in the 18 years before the creation of the Euro and in the subsequent 20 years. Statistical analysis shows that the variability of growth between these countries has increased in the Euro period compared to the pre-euro period. (See final column in table below.) While complete convergence is neither desirable 61. Thematic analysisThe Euro has survived its first twenty years, despite the global financial crisis, sovereign debt defaults and crises in the banking system. But the euro-zone will need significant structural reform if the Euro is to be a long-term success.Table 1: Main Eurozone countries pre and post-Euro economic performance * except Greece which joined in 2001Source: Eurostatnor achievable in any monetary union, some degree of convergence is necessary for the long-term sustainability of the Euro. Moreover, continued divergence risks undermining the single currency, threatening its ultimate break up. On a more positive note there has been reduced variability of inflation at lower average rates across euro members. To a large extent this reflects much lower average rates in previous high inflation countries, such as Spain, Portugal and Greece. In many cases this lower inflation has been achieved at the expense of reduced economic growth and higher unemployment rates. But there can be no doubt that the ECB has met its mandate to deliver “below but close to 2% CPI inflation” in the euro area as a whole.THE NEXT 20 YEARSThe history of monetary unions is that they require political union in order to ensure long-term survival. The Euro is no different. So while it has been saved its fundamental structural flaws remain. These will need remedying in the next 20 years. In the long-term the euro-zone will need a central finance ministry with a budget to operate a stabilisation policy. In addition, debt mutualisation will be necessary i.e. the euro-zone as a whole guarantees each members debts. Such developments would help cement the euro by providing through a euro-zone budget an alternative means of economic adjustment.These issues are illustrated by the recent situation in Italy. Italian public sector debt is around 130 per cent of GDP and the European Commission insists that the Italian budget should ensure that this debt level is on a declining trend. But the recently elected Italian government insisted on a more relaxed budgetary stance as it attempted to tackle poverty and stimulate the economy. The stakes with Italy are high its economy is over 8 times larger than that of Greece, for example, so default and bail out would have serious economic consequences for the euro area as a whole. As the chart shows the spread between Italian and German 10-year Government bond yields widened towards the end of 2018, r