Senior finance executives are bullish about continued global economic growth and are prepared to increase their spending and investment in light of the benign environment.
This was one of the main findings of this year's 2018 Global business and spending outlook by American Express and Institutional Investor. Last year's survey predicted growth would continue and this year's survey results continue that theme.
What is global economic growth?
What Is Economic Growth?
Economic growth is an increase in the production of economic goods and services, compared from one period of time to another. It can be measured in nominal or real (adjusted for inflation) terms. Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used.
Understanding Economic Growth
In simplest terms, economic growth refers to an increase in aggregate production in an economy. Often, but not necessarily, aggregate gains in production correlate with increased average marginal productivity. That leads to an increase in incomes, inspiring consumers to open up their wallets and buy more, which means a higher material quality of life or standard of living.
In economics, growth is commonly modeled as a function of physical capital, human capital, labor force, and technology. Simply put, increasing the quantity or quality of the working age population, the tools that they have to work with, and the recipes that they have available to combine labor, capital, and raw materials, will lead to increased economic output.
There are a few ways to generate economic growth. The first is an increase in the amount of physical capital goods in the economy. Adding capital to the economy tends to increase productivity of labor. Newer, better, and more tools mean that workers can produce more output per time period. For a simple example, a fisherman with a net will catch more fish per hour than a fisherman with a pointy stick. However two things are critical to this process. Someone in the economy must first engage in some form of saving (sacrificing their current consumption) in order to free up the resources to create the new capital, and the new capital must be the right type, in the right place, at the right time for workers to actually use it productively.
A second method of producing economic growth is technological improvement. An example of this is the invention of gasoline fuel; prior to the discovery of the energy-generating power of gasoline, the economic value of petroleum was relatively low. The use of gasoline became a better and more productive method of transporting goods in process and distributing final goods more efficiently. Improved technology allows workers to produce more output with the same stock of capital goods, by combining them in novel ways that are more productive. Like capital growth, the rate of technical growth is highly dependent on the rate of savings and investment, since savings and investment are necessary to engage in research and development.
Another way to generate economic growth is to grow the labor force. All else equal, more workers generate more economic goods and services. During the 19th century, a portion of the robust U.S. economic growth was due to a high influx of cheap, productive immigrant labor. Like capital driven growth however, there are some key conditions to this process. Increasing the labor force also necessarily increases the amount of output that must be consumed in order to provide for the basic subsistence of the new workers, so the new workers need to be at least productive enough to offset this and not be net consumers. Also just like additions to capital, it is important for the right type of workers to flow to the right jobs in the right places in combination with the right types of complementary capital goods in order to realize their productive potential.
The last method is increases in human capital. This means laborers become more skilled at their crafts, raising their productivity through skills training, trial and error, or simply more practice. Savings, investment, and specialization are the most consistent and easily controlled methods. Human capital in this context can also refer to social and institutional capital; behavioral tendencies toward higher social trust and reciprocity and political or economic innovations like improved protections for property rights are in effect types of human capital that can increase the productivity of the economy.
Measured in Dollars, Not Goods and Services
A growing or more productive economy makes more goods and provides more services than before. However, some goods and services are considered more valuable than others. For example, a smartphone is considered more valuable than a pair of socks. Growth has to be measured in the value of goods and services, not only the quantity.
Another problem is not all individuals place the same value on the same goods and services. A heater is more valuable to a resident of Alaska, while an air conditioner is more valuable to a resident of Florida. Some people value steak more than fish, and vice versa. Because value is subjective, measuring for all individuals is very tricky.
The common approximation is to use the current market value. In the United States, this is measured in terms of U.S. dollars and added all together to produce aggregate measures of output including Gross Domestic Product.
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Global economic growth survey by finance executives
According to the results of the research, which sought the views of 870 senior executives worldwide from businesses with revenues in excess of US$500 million annually, 85% of senior finance executives globally expect substantial or modest economic expansion in 2018. This represents a 15% rise from last year's result of 70%.
In total 54% of respondents said their businesses had grown over the last 12 months, a jump from last year's result of 44%. In Europe, 69% of respondents reported revenue growth compared to the previous year. In the Asia-Pacific region 66% of executives said their revenue was higher than a year ago.
Global economic growth rate
Strong trade growth was one factor executives cited as helping to stimulate growth and this is expected to continue.
The report notes, “Political change and global trade policy are especially likely to strengthen growth prospects for companies in 2018, according to 52% of respondents."
Asia-Pacific executives were the most positive of all executives surveyed for the research, with 59% expecting trade to contribute to business performance.
Additionally, 68% of the executives surveyed said exports will become much more or somewhat more important to their business's growth prospects this year, up from 63% in 2017.
In an environment where trade is driving growth, executives are becoming less anxious about political surprises having an impact on their businesses. But they are still looking for ways to better manage their risks, especially across the Asia-Pacific region. Overall, the results show more executives (68% in 2018 compared to 43% in 2017) want to expand risk management programs this year.
When it comes to spending and investment, executives want to focus their efforts on better meeting customer needs, protecting market share and investing in new products and services. The results show more than 70% of executives expect spending to increase by 6% or more this year.
Globally, 16% of companies expect an aggressive rise in spending to achieve top-line revenue growth, with a similar percentage indicating they intend to tighten the reins to support profits. The survey indicates the biggest investment will happen in the Asia-Pacific region, especially Japan.
This investment will be made to better meet customer needs, with 71% of respondents saying this is their focus, up from 48% last year. Half of those surveyed said they intend to enter new markets and 39% said they intend to improve shareholder returns.
Protecting market share is especially important for Asia-Pacific executives with 41% stating this is one of their top business goals this year. While almost half (48%) of Asia-Pacific executives anticipate increasing spending on production capacity and service delivery, up from 23% last survey.
Given the rise of strict data privacy rules such as the European Union's General Data Privacy Regulation (GDPR) and the introduction of mandatory data breach reporting in Australia, technology spend is an important agenda item for global executives.
The research shows executives intend to apply their tech budget to cyber security and protecting sensitive data. On top of this, global executives are exploring how new tools such as artificial intelligence, automation and robotics may be a source of change for their businesses, with many already incorporating these innovations into their enterprises.
In total 65% of Asia-Pacific executives, compared to 47% of global respondents, are especially likely to use insurance and hedging instruments to manage economic and political uncertainty at home or abroad.
Staffing remains an important issue around the world and the executives surveyed for the research expect to add to headcount this year. However, finding management, administration and support staff remains a challenge. As a result, executives are increasingly relying on temporary staff to meet their human resource needs.
Asia-Pacific executives said they were more than twice as likely to add to their planning teams and rely more on third-party data in planning activities compared with executives working elsewhere in the world.
When it comes to the changing role of senior finance staff, executives reported “they are most likely to see substantial financial benefits from greater end-to-end visibility into transaction processes (70%), improvements in their ability to negotiate with suppliers and customers (63%), and in closer, more collaborative relationships among finance, procurement, and treasury functions (54%)."
This contrast with the 2017 result, which indicated the vast majority (97%) of executives were laser-focused on end-to-end visibility into transaction processes.
Overall, the survey results indicate the strong likelihood of continued global growth and optimism among senior executives.
Key Takeaways
- Global executives expect growth to continue, but at a slower pace.
- Executives anticipate improved opportunities for global trade will help support their business's growth profile.
- A trend towards increased spending and investment to better meet customer needs, protect market share, and invest in new products and services.