Accountants souring on prospects for economy

Economic confidence among accountants and finance professionals in North America has declined to levels seen during the height of the COVID-19 pandemic in 2020, according to a new survey.

The quarterly Global Economic Conditions Survey, released Thursday by the Association of Chartered Certified Accountants and the Institute of Management Accountants, showed a significant deterioration in the global economic outlook thanks to the effects of the war in Ukraine and the surge in inflation internationally. But while risks have risen, indications are a global recession will be avoided. While confidence among financial professionals has dropped sharply, the global confidence level remains above the low point reached at the height of the COVID-19 pandemic. 

“Post-pandemic recovery has now given way to negligible economic growth, elevated inflation, and extreme uncertainty,” said Jamie Lyon, head of skills, sectors and technology at the ACCA, in a statement. “The war in Ukraine has given inflation a further boost by pushing commodity prices higher. But inflation was already high and rising before the war started in February: a strong rebound in demand fueled by a massive monetary and fiscal response to the COVID pandemic had run up against supply shortages, resulting in a surge in price pressures.”

The two “fear” indices that reflect the level of concern that customers and suppliers may go out of business were little changed in the Q2 survey, which was conducted in mid-June, both edged slightly higher. Both indices have fallen back from the extreme levels seen in 2020 but remain above pre-pandemic levels.

The largest decline in confidence happened in the Middle East, a region more exposed to trade with Russia and Ukraine, while North America and Western Europe saw especially large falls due to big jumps in inflation in recent months. Only in North America has confidence fallen back to levels seen during the height of economic uncertainty in 2020. In other parts of the world, the declines in confidence were significant, but more modest. 

While the outlook has darkened, the drop in confidence is much greater than the reported drop in orders. Orders, which are a leading indicator of economic activity, are above their long-run average on the index, while the employment index is also well above its long-run average, despite dropping in the second quarter. Jobs markets are tight and employment is rising in many economies, offsetting the effects of high inflation on real incomes to some extent.

“High inflation is resulting in falls in real disposable incomes putting downward pressure on private demand, especially household consumption,” said Loreal Jiles, vice president of research and thought leadership at the IMA, in a statement. “Prices of both food and energy are rising rapidly. The result is a cost-of-living crunch on low-income households in advanced economies and across virtually all low and middle-income countries, where these two categories account for a high share of spending.”  

Institute of Management Accountants headquarters in Montvale, N.J.

In a list of top concerns cited since the Q1 survey, financial professionals have exchanged concerns over COVID for worries about inflation and rising interest rates. But for the third survey in a row, supply shortages and supply chain issues have remained the risk that ranked highest among concerns. Hope that this issue would fade in importance as 2022 progressed is fading. 

“Risks of a global recession have increased but our central case is that growth will be positive if rather weak,” Lyon stated. “Employment growth may support total consumption. Nonetheless, with the exception of the COVID recession of 2020, we expect global GDP growth this year and next will be the weakest since the global financial crisis of 2007-2009.”

Accountants can help their companies and clients prepare for whatever comes next, thanks to their experience with navigating through previous recessions. 

“Those of us who have been in the industry for long enough remember the dotcom bust of the 2000s and the financial meltdown in 2008, and this looming recession is a little bit different in that everybody seems to see it coming,” IMA CFO Russ Porter recently told Accounting Today. “It’s bad news that it’s coming, but it’s good news that we as finance professionals have some time to prepare. We have the ability to look ahead and start doing some of the work that needs to be done now to make sure that our organizations can not only survive through an economic downturn, but also be ready to thrive on the other side of it. The one thing I’m sure of is that whatever recession is coming, it’s going to end and growth is going to come back into the market. The basic thing I talk about is getting ready. First is surviving it, and this is where CFOs and finance really step up to the plate and earn their paychecks. When times are good, almost anybody can look good, but when times get tough, that’s when people like us can step up and say this is where we add value. We’re running scenarios, we’re providing decision support, we’re getting ready for what’s coming and what comes after.”

Recession fears sparked further on Wednesday with news from the U.S. Bureau of Labor Statistics that the Consumer Price Index rose to 9.1% in June compared to a year ago, the biggest increase since April 1980, with prices on gasoline, housing and food rising the most last month. 

Porter advises finance leaders to make sure their organizations have adequate liquidity and that other fundamentals are in place. “Look at what your core values are and what your mission is and make sure it’s going to survive through a recession,” he added. “As business leaders, you’ve got to know what’s going on in your ecosystem. How is a recession going to affect your customers, your suppliers, your competitors? How is it going to affect the channel and your route to market and your employees?”