Businesses call for public spending as confidence in EU grows

07 June 2017 Consultancy.uk

Business sentiment across key European Union members is improving, a new report from McKinsey & Company has found. Meanwhile, the paper showed businesses tended to be more optimistic about the future of the regions GDP growth, their revenue growth, headcount and investment than economists. However, companies surveyed across the region were also found have a greater appetite for public investment, particularly in the areas of green investments and energy investment, as well as ICT and education, which the EU could do more to provide.

Sentiment from EU businesses has risen, a new McKinsey & Company McKinsey Global Institute study has found. The study, titled ‘European Business: Overcoming Uncertainty, Strengthening Recovery’, examined current business sentiment in the EU, as well as sentiment for the EU and its umbrella of institutions, interviewing 2,000 C-suite executives, across six European Union countries, questioning them on everything from their companies outlook to the wider role of the EU.

Business sentiment improves

The research found that, after a considerable dip in the wake of the financial crisis, from 115 basis points at the start of 2007 to around 65 by the bottom in 2009, and a smaller dip to a low of around 85 between 2012 and 2014, confidence in the most recent period has stabilised. The most recent reading of 109 follows a relatively sharp boost in confidence from midway through 2016 – seemingly in spite of the UK’s collective decision to exit the Union.

Business are more positive about outlook than economists

Researchers further asked respondents about their forecast for four key economic indicators, GDP growth, revenue growth, headcount growth and investment growth.

GDP growth predictions meanwhile varied considerably across respondents. The lower end of the sample predicted growth at 0.8% annually, the midpoint of the range at 2% while the upper end of the range came in at 3.2% annually. Revenue forecasts were considerably more positive than the economic and historical forecasts meanwhile, at 2.1% and 3.1% exacted change for the mid and high of the range respectively. Economic forecasts amongst the group stood at 1.7% annually while historical performance would have 1.9% annually.

Businesses were also found to be considerably more upbeat about employment growth than economists, and relatively in-line with historical performance. The midpoint range expected an employment change of 2.4% between 2017-2019, while the high end of the range predicted 3% change in the same period. Investment growth too is seen favourably by respondents, at 6.9% for the midpoint and 8.8% for the high end between 2017-2019, while economic forecasters come in at 6.7% and historical performance stands at 4.3%.

Benefits and challenges of EU membership

In recent years, much discussion has taken place regarding the future of the EU, particularly in light of the UK’s Brexit decision, and key election cycles in member states including France, Germany, the Netherlands and the UK itself in 2017. The research asked the business respondents to indicate what key benefits and challenges they may face due to EU membership.

In terms of key benefits for EU membership, the ‘maintenance of peace and security across the EU’ ranked number one, with 11% of respondents, followed by ‘east of doing business’ at 10%, and ‘access to markets to sell goods/services’, also at 10%. The business respondents also cited ‘consistent regulations and unified standards’ and ‘stronger position in world affairs’ as benefits from membership.

The areas in which the business respondents noted challenges include a ‘loss of national sovereignty’ at 19% of respondents, as well as ‘exposure to European competition’ at 16% of respondents. Other areas noted include ‘limited transparency of decision making’ and ‘inability to control individual country currencies (within the Eurozone)’.

Case of investment increase across EU

Need for change in spending

One area in which the EU has, in recent years, put on the breaks is public investment – as the Union continues to champion austerity across the region a decade after the initial global economic crisis hit economies world-wide. Countries in the region have piled on debt in the years following the crisis – and while debt levels across all segments appear to have stabilised, the Union continues to block a number of strategic investments – most notably being perceived to have ‘crushed’ the Greek government as the Syriza government of 2015 attempted to make state investments to pay back its crippling debt to the Troika of the World Bank, the IMF and the EC.

The study found that in general, businesses are positive about investment, and in around a third of cases, even if it means higher taxes being levied on them to fund investment. In Germany 32% of respondents are keen to see increased taxes fund investment, with similar numbers in Italy and France (35% and 33% respectively). Those opposed to increased investment averaged around 20% across countries surveyed.

The biggest item to require investment according to the ‘yes’ group was energy and green investments – with 40% of respondents stating a desire to see public spending in that area – followed by investment in ICT infrastructure (39%), R&D (39%), education (38%) and physical infrastructure (37%).

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