3 Reasons why business without confidence could be permanently here to stay.

There appears to have been a significant shift in the relevance of business confidence as an indicator of company behaviour, which could have big implications for the way economies respond to the current economic downturn. Evidence from a number of recent business trackers suggests that the disparity between how companies feel about the future and the reality of their current trading performance is widening. The upshot is that more businesses now feel worse about the prospects of recovery even though their own commercial performances continue to hold up than was the case several months ago, a trend which looks set to continue.

INDEXING  PESSIMISM

A global economic downturn, a critical Eurozone crisis and the USA flirting with systemic loss of economic status should in theory be everyone’s wave of doom, washing away any prospect of growth or economic recovery. Yet that doesn’t seem to be the case. Amongst a crop of recently published economic barometers that have filled autumnal news rooms with business gloom, there are a number that appear to have a slightly different message, which unsurprisingly we tend to hear less about.

The Bibby Index: economic recovery receding

The Bibby index is one. A 5-year-old quarterly economic indicator based on a blend of commercial and attitudinal data from companies has just published its Q3 index. The results show that in practically every business sector company performances are now ahead of their 2007 levels. Far from painting a picture of economic hardship the data if anything suggests that the SME sector is proving remarkably resilient in the face of adversity. Not that anyone is admitting it. Despite the robust commercial performance confidence in economic recovery has hit an all-time low, with 80% of businesses expecting no change in macro-economic outlook for the next 1-3 years.

A more classical bellwether industry, the advertising business, displays similar signs. The latest IPA Bellwether survey  reveals that for the first time since Q2 2007 marketing budgets for all sectors are going up, with 21% of all companies reporting an upward revision to their forecast for 2012, compared to 17% that report a reduction. The internet saw the steepest increase by a wide margin and the largest quarter-on-quarter jump in the history of the report. Yet business optimism is falling further, with marketing executives’ confidence for the industries in which they operate hitting a two-and-a half year low. Even though they were slightly more optimistic about their own companies’ prospects the degree of optimism was the second lowest since Q1 2009.

THE CONFIDENCE CONNECTION

All this begs a bigger question about whether business confidence is still connected to commercial reality or has the act of asking companies how they feel about the future simply run out of legs? If feeling bad about it doesn’t have as much bearing on doing okay there seems less point in asking the question. Perhaps we are simply moving towards a post-confidence age, where most things in the future don’t look very rosy (climate change, over-population, food shortages, rising energy costs, melting ice caps, etc). Not surprisingly the economy is an inescapable part of all this so it shouldn’t be a massive surprise to see it tarred by the same pessimistic brush.

Equally, perhaps we’re also entering an age where ‘macro’ and ‘micro’ trends are less reflective of one another than they once were. Many companies appear to feel more confident about their own destiny than they do the economy’s because their business world isn’t as seen on TV. It occupies a different mental space, which is so much more about the here and now that thinking too far ahead is sometimes regarded as getting ahead of oneself.

Or perhaps the very idea of recovery is becoming a little far fetched. Instead of a return to a past economic equilibrium there are plenty of commentators who now believe the business world is really being re-shaped to a point of no return, by a cycle that is as profound as previous industrial revolutions (see above). Indeed it’s hard to imagine that any poll of business confidence taken at the peak of the steam power boom of the 19th century would necessarily be brimming with optimism. Just like today the paramount concerns would most likely have been that employment prospects were dwindling and any benefits arising from new technologies would only really be enjoyed by generations still waiting to be born.

But if reading the tea leaves of confidence is less revealing about how companies are really behaving why is the habit so entrenched and why is it unlikely to change anytime soon? There are probably many reasons, yet here are 3 of the most endemic.

1. Imprisoned by our past.

As we’ve reported before, many of the indexes that purport to represent real business life don’t. As economies change the weight of historical business data often prevents a clear view of the companies that are coming to the fore. The UK FTSE 100 index is a case in point. Many of the companies it features are in the mining industry – a sector of the UK economy that has been shrinking rapidly for the last four decades. Whilst industries change, the information about them can linger longer than is often helpful as it leaves us looking into the future via a rear-view mirror.

2. Bad news sells.

‘Companies thrive in the downturn’ is a headline that is statistically 5 times less likely to appear than ‘More business go to the wall’. Take this recent excerpt from the Daily Telegraph, reporting on data just released by the Centre for Economic and Business Research (CEBR);

More companies are now pessimistic about their prospects than bullish and intend to sack staff in an attempt to reduce costs and save cash. A balance of 5.8pc of small firms intend to lay off workers over the next three months, suggesting a further increase in the unemployment rate.

Presumably the 94% of firms that aren’t planning to reduce their work force in the next quarter are just biding their time before following suit.

3. Confidence is the cousin of calamity.

Whilst there are no rational grounds for behaving this way, it appears that many business people still feel that admitting to optimism is a psychological risk not worth taking. As if talking the company up is a sure fire way to see it go down. So whilst it might be tempting to infer a connection between corporate pessimism and economic reality, the truth might be a form of reverse wishful thinking – the blacker we paint the picture, the more likely it will have shades of grey.

Comments

  1. Lalaine says:

    You coudln’t pay me to ignore these posts!

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