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Global sentiment slips due to political uncertainty and trade war fears

Staff Writer |
Having reached a three-and-a-half year peak earlier in 2018, global sentiment has since waned amid rising political uncertainty and escalating concerns over the potential impact of trade wars.

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The IHS Markit Global Business Outlook survey – based on responses from a panel of 12,000 companies – shows that optimists outstripped pessimists by +31%, down from +33% at the start of the year.

Sentiment among the largest emerging economies is at its lowest in one year, as is the case in developed markets.

Optimism has sunk especially sharply in Germany, Brazil, France and Spain.

No change is seen in India and China.

Japan, Russia and Ireland are the only three countries to see improving optimism towards the year-ahead outlook for output.

The fall in confidence is also widespread across the manufacturing and service sectors.

Expectations of weaker output in the coming year have translated into downward revisions to hiring and capital expenditure intentions.

Job creation looks set to be stronger in developed countries on average than in emerging markets, while capex plans are similar.

Despite moderating from earlier in 2018, inflation expectations remain elevated by historical standards.

The net balance of global firms predicting greater cost burdens is the second-highest recorded in over five years, while that for selling prices is the secondhighest since February 2014.

Companies worldwide envisage that currency fluctuations, trade wars, tariffs, higher prices for oil and other commodities will push up input costs.

As a result, profitability predictions have been revised lower on average.

The strongest expected rises in cost pressures are recorded in Brazil, followed by Ireland, Germany and the UK.

The weakest increase is expected in China.

However, of note, Japanese firms’ expectations of future input costs are up to a survey record high.

In the US, sentiment regarding business activity has softened slightly but continues to run close to the near four-year high seen in February.

Service providers remain more upbeat than manufacturers, commonly expecting to benefit from expansionary government policies and rising domestic demand.

Nevertheless, the US was the only country other than India where manufacturers have reported improved output expectations for the year ahead.

Sentiment in the euro area has weakened in a broadbased fashion, down to a two-year low.

Companies are less confident about business activity, employment, capex and profitability than earlier in the year.

The downturn in business confidence at the eurozone level is widespread across the manufacturing and service sectors, with firms increasingly concerned about protectionist measures, supply bottlenecks as well as political risks, including Brexit and political change in Germany, Italy and Spain.

On all measures, the largest drop in optimism is seen in Germany, where confidence sank to the lowest since late-2014.

Firms in France and Spain are likewise less upbeat regarding growth prospects, with optimism the lowest since October 2016 and June 2013 respectively.

The only eurozone nation to see an improvement in sentiment is Ireland, where companies are also the most confident of the 12 countries worldwide for which comparable data are available.

After having started 2018 on an upbeat tone, UK companies have displayed a slight loss of confidence midway through the year.

Heightened political uncertainty arising from Brexit negotiations, spikes in cost burdens, competitive pressures, tariffs and sterling weakness are among the factors foreseen to lead to market instability and therefore impact on growth.

However, although net balances for expected business activity and employment are lower than in February, they remain above the eurozone, developed markets and global averages.

Japanese private sector firms are more optimistic towards the year-ahead outlook for business activity than they were in February.

In addition to Ireland, Japan was the only developed economy to see service sector companies grow more optimistic about the outlook.

The overall degree of confidence nonetheless remains subdued compared to other nations and is the joint-lowest worldwide (equal to China).

Hiring intentions have been revised higher, reaching a jointsurvey peak, while capex plans are unchanged.

Out of the four largest developing nations, sentiment is the strongest in Brazil and the weakest in China.

Brazil’s outperformance is despite the net balance of firms predicting output growth in the year ahead falling to its lowest in over two years.

Hampering optimism are unstable economic conditions, the upcoming presidential elections, real depreciation and fierce competition.

Hiring intentions are the lowest in two years, while capex plans and profits expectations are both at one-year lows.

The net balance of +19% of firms predicting output growth in China is the joint-lowest globally and unchanged on earlier in the year.

Pollution-reducing policies, competitive pressures and a potential trade war are seen as the main likely causes of weaker output growth.

As such, hiring plans have been revised lower and are among the weakest in the history of the survey.

Chinese firms are the least confident regarding job creation globally.

Similarly, profitability expectations and capex plans are close to survey lows.

Optimism in India is unchanged from the start of the year, ahead only of those recorded in China and Japan.

Companies have commented on the possibilities of customer defaults, challenging market conditions, political instability, raw material shortages, taxation and higher oil prices as the key threats to growth prospects.

Russia is among the few nations to see an improvement in confidence during June, but the business activity net balance remains lower than the global average.

Despite stronger predictions of output growth, forecasts of capital spending, profits and hiring intentions have been revised lower.




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