It is the burning question for Europe — will it ever again grow at a reasonable rate?
There are signs of a pick-up in the region’s economy, particularly in countries that were the most damaged by the financial crisis, such as Spain. Meanwhile, the European Central Bank is pumping money ever more enthusiastically into the system.
But policymakers fear that European businesses, scarred by the experience of the past six years, may have changed their behaviour permanently, shunning growth opportunities in favour of “safety first”.
Chris Gentle, head of Emea research at Deloitte in London flags the risks. “Who is owning the growth agenda? It should be chief executives, but they have not been rewarded recently for taking risks. The danger is that Europe will lose competitiveness in the long term,” he says.
There is concrete evidence of Europe’s slide down the global league tables. Since 2010, a net balance of 41 European companies have exited the Global Fortune 500, the sharpest fall on record.
One sign of companies’ risk aversion has been their desire to hoard cash. This is not just a European phenomenon. Globally, the leading 1,000 public non-financial companies have accumulated a staggering $3.5 trillion (Dh12.85 trillion) in cash reserves, compared with under $2 trillion in 2008.
Some $1.6 trillion of this is in US companies’ hands - much of it held overseas. But Europe’s listed companies are fast approaching that total, with an estimated €963 billion (Dh4.58 trillion) in cash reserves, €250 billion higher than in 2007, before the crisis hit. And they are continuing to squirrel away money. Deloitte estimates that the 1,200 listed companies in the region have added nearly €50 billion to their cash piles over the past 12 months alone.
Cash hoarding has been achieved in different ways. Most corporates in Europe have undergone brutal adjustments over the past six years, cutting costs by firing staff, closing operations or selling off businesses, and by postponing upgrades or even maintenance of assets such as buildings or technology. Further delays to necessary upkeep spending also pose dangers to growth.
“Putting off maintenance capex can only go on for so long,” warns Gentle.
Meanwhile, Europe’s bigger listed companies have taken advantage of historically low interest rates in bond markets to borrow cheaply, often upping debt levels even as cash piles have increased. Last week, for example, German airline Lufthansa issued a €500 million bond with a yield of just 1.125 per cent — despite suffering a pilot strike.
But the key question in Europe is when — and, indeed, whether — companies will start using some of these hard-won riches to invest in growth opportunities. For some, the wait is becoming dangerously long.
“It is a vicious circle,” says James Watson, director of economic affairs at BusinessEurope, the Brussels-based lobby group. “The whole problem is that you need investment to achieve growth but firms don’t want to invest unless they feel growth is on the way. But we haven’t really reached that stage in Europe.”
Amid the gloom, however, there is some reason for cheer. Deloitte, which recently surveyed 271 private and public companies in Europe, the Middle East and Africa on their spending plans, says it has identified some signs of their greater willingness to put their money to work.
“The majority of large businesses across Emea have reached a pivot point in their attitude to investing, with the impetus to use their cash reserves for growth increasing all the time,” says Gentle. “However, confidence remains brittle and it is likely that such activity will return gradually.”
For other analysts, the picture is far less encouraging. “Companies are holding on to cash because, first of all, we’ve got low growth and it’s not particularly attractive to invest,” says Watson.
The picture on the ground supports this. The top priority for a third of the companies surveyed by Deloitte was making investments, but almost as many — 31 per cent — said their most important task remained strengthening the balance-sheet. Those that are putting their hands in their pockets are not always doing it to fund future growth.
Only a small majority — 55 per cent — of the companies ranked growth as the primary focus for their investment over the next 12 months. Nearly a quarter of those that planned to invest said their priority was on maintaining business assets and investing in staff training and development.
The latter, says Deloitte, suggests that a lack of relevant skills is providing an increasing challenge to European businesses.
“Faced with an ageing workforce, business leaders seem set on addressing the challenge of increasing productivity to enhance competitiveness,” says Gentle. “This is a major shift from the past 10 to 15 years, where the focus has been less on the impact of human capital and more on technological and business process innovation.”
“The findings suggest that both listed and non-listed companies across Emea have been behaving in a similar fashion, preserving their cash,” he adds.
Gareth Williams, corporate economist at Standard & Poor’s in London, says it is easy to understand why companies are “keeping their powder dry”.
“In Europe itself the recovery appears to have stalled and you’ve got the ECB moving to take increasingly aggressive steps to encourage recovery,” he says. “If you’re a [company] treasurer faced with that environment you are going to be more cautious than you were before the crisis.”
Increasing political risk is another worry. “One minute the Middle East is raising concerns, then you have the situation in the Ukraine, closer to home you have concerns over Scotland,” says Williams. “In addition the recovery has not had the strength or normal process of other recoveries and [companies] are responding to that.”
Perhaps surprisingly, despite the increase in political risk in the region, Deloitte found that a majority of the companies that planned to increase their investment intended to focus their growth plans on the Eurozone. Gentle says this implies a worrying contradiction.
“Many companies expect double-digit revenue growth in the years to come, yet continue to focus much of their efforts on the Eurozone, a region identified by most as having relatively low growth prospects,” he says.
“Ultimately what we’re talking about is a lack of visibility around the political and economic environment over the next few years,” says S&P’s Williams. “When you’re looking to invest, particularly substantial investments, you need that visibility.”
Financial Times
