Bank researcher Ronald Ramkissoon, left, joins MFOs
client services manager Kimberly Philip and Republic executive
director Gregory Thomson at the re-launch of the Consumer
Confidence Index on July 19. Photo: Ian Gooding
The third quarter issue of our Corporate Confidence Indices
(CCI) released this week shows a decline in five of the
six economic dimensions examined. Just what are the implications
of these findings? This week we will explore the significance
of the variables which underpin the indices and show how
they impact on the economic landscape.
The primary aim of the CCI is to quantify the expectations
that executives and business leaders have with respect to
five variables key to understanding the current business
climate in T&T: financial performance, investment, employment
and the performance of the local and global economies.
It is essential for executives to keep track of the fluctuations
in the outlook/expectations regarding these factors because
of the significant impact that they have over existing prices,
sales, incomes and other key variables.
From as early as the 1950s economists recognised that
expectations were an important determinant of economic behaviour.
The expectations examined by the CCI are important because
of their often considerable influence over the current economic
behaviour of households and firms and consequently on current
prices and the prevailing level of economic activity.
For example, expectations of a shortage of bottled water
during a hurricane can make it almost impossible to obtain
any prior to the storm as people (governed by their beliefs
about the future supply of the good) procure more water
than they need in the expectation of a shortage.
This increased demand then increases the likelihood of a
shortage, illustrating how current economic behaviour can
be tied to future expectations.
The CCI comprises firstly a Financial Performance Index,
which gives a generalised overview of the past financial
performance of the firm.
Past financial performance helps shape future expectations.
Overall, more executives felt that their financial performance
had deteriorated over the past six months than the last
quarter, as this index decreased by 25 index points.
As such we expect that executives financial outlook
should also have deteriorated.
The Financial Outlook Index measures executive opinion about
the expected financial performance of their firms in the
relative short term (six months) and long term (12 months)
in order to determine what their level of economic activity
is anticipated to be over these time periods.
In this way it is possible to gauge expectations of the
future health of the macroeconomy from the point of view
of decision makers. Executives can then tailor their business
activities to maximise their returns in this expected economic
This quarter, executives short run financial outlook
fell by 20 index points, while their financial outlook for
the long run fell by 15.
This continues the downward trend of this index since the
third quarter of 2005 which is consistent with movements
in the Financial Performance Index.
Executives are somewhat cautious about the financial prospects
of their organisations in the coming months and have been
so for some time.
This, combined with the fact that GDP growth has generally
slowed in the last couple years, indicates that executives
should prepare themselves to take the steps necessary to
maintain their profit margins in this anticipated business
This index examines the outlook for planned investments
in fixed and human capital in the relative short and long
It may, therefore, be used to anticipate the demand for
capital goods (ie whether this is likely to increase or
decrease at the macro level) and the associated pattern
of domestic expenditure.
Since investment increases the future production capacity
of the economy as a whole, the pattern of anticipated investment
given by the index may serve as an indicator of future economic
activity, allowing executives to take this into consideration
when acting in the best interest of their firms. The outlook
for both short and long term investments rose for this quarter
by seven and two points respectively. This intended increase
in investment contradicts what might be expected from the
falling Financial Outlook Index.
In response to this decline it may seem more prudent for
executives to cut back on investments in order to minimise
costs over the long term and protect profits. It does appear
that they are being cautious about their investment spending
as the index for both time periods increased only moderately.
The Employment Outlook Index explores anticipated expansion
or contraction in the human resource base. This indicates
the probable direction of buying power and macroeconomic
activity in the near future.
For example, a general increase in employment would most
likely lead to increased buying power, a rise in the demand
for goods and services and growth in economic activity (although
the downside of this is increasing inflation if production
does not keep pace with the growth of the money supply).
On the other hand, a decrease in employment would lead to
reduced buying power and less demand for goods and services,
which results in lower macroeconomic activity and a dampening
of the inflation rate.
The outlook for employment fell for both time periods and
has been falling since the beginning of the year.
Expectations for hiring in the relative short term fell
by nine index points whilst those for the long term fell
by ten index points. This is consistent with the outlook
for financial performance and investment.
Executives intend to spend less on expanding their HR base
but are increasing capital investment or retraining current
employees so that they can increase both human and capital
efficiency in the long run.
Local and global economic outlook
These indices explore the overall expectations of the level
of economic activity on a local and global scale. The aim
is to quantify expectations about the performance of the
In addition to investment, employment and micro financial
health, this index examines consumption, government spending
and the value of imports and exports.
The outlook for the local economy was less optimistic in
this quarter. Executive expectations for the local economy
in the short and long run fell by 20 and 21 index points
respectively, while the Global Economic Outlook index fell
by 15 and ten index points in the short and long run respectively.
Expectations for the local economy appear to be consistent
with the other indices which comprise the CCI.
Theoretically, one would expect that if the outlook for
financial performance and employment is less optimistic
than before (even with a moderately improved outlook for
investment) executives would be less optimistic about the
overall performance of the local economy.
Combined with the weakened outlook for the global economy,
this is then likely to feed into executive expectation for
the financial prospects of their firms in the future and,
by extension, the expectations for investment, employment
and the current business climate.
These indices, therefore, are essential in gauging the economic
outlook for T&T which can quickly evolve into economic
Narisha Khan is a research analyst with the Arthur Lok Jack
Graduate School of Business. She can be reached at 662-9894
ext 156 or email [email protected]