The latest FT/Economist Global Business Barometer indicated a fall in confidence among businesses around the world. More than a third of respondents expect conditions to worsen. This survey data was captured before the US rating downgrade by S&P and the latest default worries in the Eurozone – and we can only guess what that confidence level would be like today. These surveys are at best an interesting insight into macro trend, rather than the more important matters of what is actually happening on the ground. Different countries have different challenges – and different insights.
I have just returned from a trip to China visiting RSM International’s offices in the region, and so I took the opportunity to ask the RSM team there and in Hong Kong about how they view the global economy and how they expect it to impact their markets. It is crucial in our business to understand these diverse pressures and ensure they are planned for.
Our teams in China and Hong Kong provided me with a range of opinions that on balance saw positivity for the future. However, they do have medium-term concerns about the impact of a US and European slowdown. I wanted to share these insights and have summarised some of the key themes below:
On sustainability of China’s growth
China is an economic powerhouse fuelled on exports and companies involved in the export business to US and Europe will be affected by a slow down. An interesting insight from our RSM team in China is that this would be offset to a degree as China expands its internal consumption market, which will continue to fuel the economy.
On currency inflation & the property market
Currency inflation is another concern. Hong Kong dollars are pegged to US dollars thus the continuous devaluation of USD will lead to higher inflation in Hong Kong. This is likely to have an effect on the Hong Kong property market which is supported by the low interest rate regime. Last week, on a day when the stock market dipped 10% there was an unusually poor response to a public land auction. The property market in Hong Kong is a strong indicator for the optimism and confidence of Hong Kong consumers, businessmen and investors. Our team hope that the recent US announcement to maintain low interest rates over the next two years will help stabilise the property market, and provide that foundation of confidence on which the rest of the economy can base itself.
General business outlook
The slow recovery of major western economies will definitely slow down the export sector and transport sector in Hong Kong for the next twelve to eighteen months. The business outlook will slow down compared to the last eighteen months. Business will continue to grow but at a slower rate – and may be buffeted by economic changes impacting on political risk. There is always a concern of social unrest during times of economic uncertainty (UK being a recent case in point!) and changes in political leadership can also add to uncertainties to the global economy and business conditions.
These local perspectives may resonate with all of us in our own markets and I am glad that our common response is to get out there and create positives for our business. Throughout my travels I am consistently impressed by the measures taken by RSM member firms to get closer to their client’s business and understand more about the impact of economic and social change. There is no doubt that in this business to be truly effective we have to continue developing new products and services adapting quickly to our clients changing needs.
Sometimes you have to look at the small stuff to understand the complexity of economic growth. My latest trip to China was eye opening. The cost of everyday items, such as the price of fruit has risen significantly this year – by all accounts some 31% in the past 12 months (consumer prices were up 5% in the year to March). With economic growth of 9.7% the Chinese government is in an epic battle to rein in inflationary pressures, pressures that are having an effect on the wallets of the Chinese.
China has raised interest rates four times and banks’ reserve requirements seven times since October 2010, when it declared it would make fighting inflation a priority.
A further implication for unchecked Chinese inflation is in trade.
US-China trade has risen exponentially over the past thirty years – from $2 billion in 1980 to around £460 billion in 2010. This has culminated in a record US trade deficit estimated at $273 billion in 2010.
The basics are simple – China’s large population and booming economy have made it a large and growing market for US exporters. In turn, the US imports low cost goods from China.
High inflation in China poses a significant threat to China’s status as the low-cost production centre of the world, with many US firms depending on China operations for growth.
Wages are surging particularly among foreign invested firms in coastal regions, which is leading to some firms questioning whether they can continue to operate profitably in China or seek a move to a lower-wage country. This is exacerbated by a decline in surplus labour which has led to firms paying staff more money to remain competitive.
Inflation will always be of concern to any government, but it seems China has some major battles to win, and fast if it is to remain a powerhouse of world manufacturing.
On a daily basis I am reminded how fortunate I am to work with such a diverse range of personalities that comes with working in an international network – and particularly those that make up the extended RSM International network.
I recognise that many people think of accountancy as a ‘number’ industry, and while it certainly does involve having a head for figures, it takes more than a mathematician to crack the consultancy field. The very nature of ‘consultancy’ is built on the concept of relationships and trust, and to me accountancy is very much a ‘people’ business.
The economic crisis has certainly caused the public to distrust institutions – whether they are banks, businesses, regulators or government – and I wonder, has the client-consultant relationship changed at all because of it?
The Edelman Trust Barometer, which looks at credibility in business, shows that for most people values based on trust and transparency are as important as a company’s quality of products and services.
During my recent visit to China, the importance of these relationships for success in businesses became very clear. Business often occurs outside of normal working hours and isn’t complete without at least one trip to a restaurant or bar. The business and social relationship is inevitably intertwined – the more you share your personal life (including family, hobbies, political views, aspirations), the closer you are in your business relationship. Both parties want to be sure they understand and trust one another.
All clients have needs, concerns and aspirations that reach beyond the basic accounting needs of businesses. And, at the same time, they are sharing some of their most confidential information to be analysed and assessed with outsiders. It certainly makes sense then for the client – consultant relationship to build through harmonious personalities and mutual trust. I know that our professionals within the RSM network endeavour to offer not only high quality consulting and professional services, but they take a journey with their client on their road to success and are privileged to do so.