GECS Q2: Trust in the Economy has Dropped Significantly

Trust in the Economy has Dropped Significantly

Weak economy with high inflation forecasted for the second half of 2022

Amsterdam, 14 July 2022 – The war in Ukraine, high inflation, and Brexit have shown their effects on the economy: low trust and a stagnation in economic growth, according to the figures from the Global Economics Conditions Survey (GECS). Additionally, the Netherlands is struggling with the consequences of the financial support provided during the corona crisis. The GECS is a global survey developed by IMA and ACCA consisting of almost 1,000 accountants, including more than 100 CFOs, and looks at the current status of the economic situation through the eyes of leading financial professionals.

 What does the report about the last quarter show?

• Trust: Trust in the economy dropped significantly in Q2 2022, as expected. Western Europe has seen the second largest decline in trust, with only a larger decline in the Middle East. However, trust remains above the low experienced during the pandemic.
• Orders: The level of the orders slightly declined, but remained above the low experienced in 2020. Western Europe reported the largest decline in orders in Q2 across all regions.
• Economic recovery: The global economy will be weak during the second half of 2022 with high inflation. Some countries will even experience a small recession. This is also underlined in a report by PWC and the Leiden University, which highlights an increase in influx at the special management department of banks, as well as in the number of bankruptcies in the Netherlands. Inflation will most likely decrease in 2023, but the increase in interest prevents a strong economic recovery.
• Inflation: Inflation growth from Q1 continued in Q2, when inflation was the highest in decades, due to the effects of the war in Ukraine. The resulting high energy and food prices harm real incomes and expenditure. Central banks are also raising interest rates; a total of three quarters of a percent in Q3, in Europe from July onwards. This is the first European interest increase since 2011.
• Operational costs: The anxiety index rose to a new record level again this quarter. Almost 70% of the participants expressed concern about increasing operational costs. In addition to the high energy and transport costs, which already cause supply chain shortages, costs have also been increased due to rising raw material prices following the Russian invasion of Ukraine.
• Fear: The two fear indices – measuring concerns about potential client and supplier bankruptcy – have remained similar as in Q1. Both have increased minimally, but are still above pre-pandemic levels.  

Negligible growth in Western Europe

In addition to rising inflation (to a peak of 8.1% in May), the effects of the war in Ukraine have exposed Europe's reliance on oil and gas. Due partly to the effects of this exposure, confidence fell sharply in Q2, but remains above the low experienced during the pandemic. The orders, employment and expenditure indices have also fallen sharply. For the Netherlands, paying deferred taxes in October and other financial support related to COVID-19 will also affect companies’ expected cash flows, and thus growth, Intrum reports. The European Payment Report for 2022 shows that companies lack agility and expertise to manage the impact. Furthermore, neighboring Germany is hindered in growth due to delivery problems caused by the COVID-19 restrictions in China. Economic growth will therefore be negligible in the coming months. However, the GECS does not foresee a recession thanks to, amongst other things, relaxed fiscal policy and the spending of savings by households.

Labor market tightness

The global employment index is still above average, despite the decline in Q2. Labor markets are tight at the moment and employment is rising in many economies, compensating for some of the effects of high inflation on real earnings. The Netherlands also experiences shortages on the labor market. There is an upward pressure on wages, as workers seek compensation for the high inflation in a tight labor market which could intensify concerns about costs and inflation. A greater degree of monetary tightening than currently expected is then needed to bring inflation under control. This could be enough to trigger a recession or a debt crisis in many emerging markets, or both.

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