IBR Q3/2015

Ripples from China’s slowdown spread across the world.

New research from Grant Thornton’s International Business Report (IBR), a survey of 2,500+ business leaders in 36 economies, reveals that the optimism of business leaders in ASEAN countries is down sharply from the Q2 survey. Thailand dropped from 10% to -8%. The last time Thailand’s optimism was negative was in Q1/2014. However, that drop was not as significant as some of our neighbours; Indonesia dropped from 60% to 36%, Malaysia declined sharply from -5% to -28% and Singapore suffered a huge drop from 32% to -14%. Only in the Philippines did business confidence increase within the region, from 78% to 86%.

Every sub-category for Thailand dropped in Q3 too, except one, which stayed the same; selling price expectation (34% to -2%), export expectation (22% to -4%), investment in plant & machinery (34% to -4%), and employment expectation (42% to 4%). The major constraints cited for Thailand’s businesses were perhaps unsurprisingly economic uncertainty (58%) and shortage of orders (50%). Improving salesforce effectiveness and incentivising productivity improvements are the growth initiatives that Thai businesses are most likely to implement.

Andrew McBean, Partner at Grant Thornton in Thailand and specialist in ASEAN markets commented, “This has been a rough quarter for businesses in the region which puts Thailand’s own drop in to some perspective. Malaysia’s domestic issues concerning Prime Minister Datuk Seri Najib Abdul Razak are exacerbating other concerns there like China’s slowdown, the likely impending US interest rate rise, weak commodity prices and declining domestic spending. The World Bank recently downgraded GDP growth forecasts in Malaysia to 4.7% for this year and next year. This also negatively affects Singapore and the region as a whole.”
 
This quarter’s IBR report also shows that most businesses in APAC see the Trans-Pacific Partnership (TPP) as the biggest opportunity for the region over the next five years but regional conflict regarding competing territorial claims and the rebalancing of China’s economy are still the biggest threats. Interesting too was that 72% of businesses in Thailand are concerned about reshoring of manufacturing jobs by western businesses.

Andrew continued, “Thailand’s Prime Minister Prayuth Chan-o-cha was recently quoted as saying that Thailand still had a year or two to reconsider joining the TPP and so is unlikely to offer any potential stimulus for some time to come. Meanwhile Thailand’s forecasted GDP growth of 2.7% by the Bank of Thailand remains in place whilst the government promotes stimulus measures to attempt to increase this in 2016. Given the optimism figures for Thailand in Q3, businesses appear to remain sceptical of these efforts.”

The report also reveals the extent to which contagion caused by China’s economic slowdown is spreading to businesses around the world. Business confidence and expectations for revenue and exports are down, not just in China’s near neighbours, but in several major economies that count on the world’s second biggest economy as a major trading partner.

Andrew said, “We know that business sentiment affects firms’ plans to invest and grow, and there is evidence that the reaction to the Chinese slowdown could be more than a flash in the pan. The IMF warned earlier this month that financial stability is far from assured over the next year, and marked China as one to watch. Having a China strategy remains essential for businesses with international ambitions but the rebalancing of its economies highlights that diversification is essential to prevent a damaging collapse in export activity.”

The bigger challenges appear to lie with those economies which have bet heavily on China. The end of the commodity supercycle had already dampened growth prospects in places like Australia and Brazil, but we are now seeing higher value-add exporters like Germany and Japan begin to suffer. As China moves away from investment towards consumption, it will demand more services, but many of these will be provided locally.

“For businesses the message is clear: China remains a high-growth economy that offers fantastic opportunities, but overreliance on any market is dangerous. You need to be continually assessing and exploring new markets if you want to grow your business in these turbulent times,” Andrew concluded.