The 2006 edition of the Eurofactor barometer

The 2006 edition of the Eurofactor barometer shows that European businesses generally remain fairly cautious about the outlook for the coming year

(12/01/2006)

This survey conducted in conjunction with AFDCC (French association of credit managers and advisers), was carried out by the CSA.

The majority of businesses in Belgium, Spain and the UK are optimistic, with more than half expecting an increase in their sales over the next 12 months.

This business expansion will have a positive impact on the employment situation, since the outlook for recruitment is also the brightest in Belgium (31% of businesses expect to take on new staff), Spain (29%) and the UK (25%). It should also translate into higher profitability for around one in two businesses. In Spain, only 30% of businesses forecast improved profitability in the previous survey, but this year the percentage has increased to 55%.

On the other hand, prospects are currently gloomier in Germany, with barely one in four businesses expecting to achieve sales growth in 2006 (compared with 46% last year). The recruitment picture is also among the weakest in Europe, with just 8% of businesses expecting an increase in the size of their workforce (down 15 percentage points on the 2005 survey).

In Portugal and Italy, the consensus view among businesses is that their sales will be stable. As a result, the prospects for new job creation are limited (11% in Portugal and 17% in Italy), and merely around one in three businesses expects to deliver improved profitability.

In France, the business outlook has deteriorated on every front. Expectations for sales, investment, recruitment and profitability have all receded, particularly in the retail, manufacturing and transportation sectors. On the recruitment front, the percentage of businesses forecasting an increase in their salaried workforce is not only lower than in the previous year, it has also slumped to a low level of 17%. This said, more businesses expect an increase than a decrease (6%), which thus points to an improvement in private-sector employment levels-albeit at a slow pace.

Staying in France, the sales growth expectations of transportation companies, which have enjoyed a strong run in recent years, have receded for 2006. Just 40% of businesses in the sector anticipate an increase in their sales compared with 62% last year. Sentiment in the retail sector is also less optimistic, with just 35% of businesses predicting sales growth during 2006 compared with 54% in the 2005 survey, representing a fall of 21 percentage points.

Lastly, although construction businesses are the only ones more optimistic than in 2005 regarding their sales prospects (34% predict sales growth compared with 29% last year), these figures are nonetheless lower than the national average of 38%.

Investment expectations are strongest in Germany, Belgium and Spain, in spite of some degree of uncertainty in Spain. Of the businesses surveyed in Spain, 31% were unable to say whether their capital spending will increase or decrease in 2006. In Germany, 59% of businesses expect their capital spending to increase by more than 5% compared with investment over the previous 12 months.

In France, Portugal and Italy, on the other hand, the investment outlook is shrouded in uncertainty (around one-third of respondents did not answer this question), even though those predicting an increase exceeded those anticipating no change, except in France, where just one company in four projects higher capital spending in 2006 than in 2005.

Lastly, all countries combined, this investment is likely to be devoted primarily to production plant and equipment and to IT and desktop systems (especially in Belgium, Italy and the UK). Even so, most of this expenditure is likely to relate to the modernisation and replacement of existing equipment rather than spending on new items.

In the previous survey, investment was expected to be devoted to IT equipment in priority across all the European countries surveyed.

The rise in commodity prices is regarded as a hindrance by the majority of European manufacturing companies, comprising three-quarters of businesses in France, Germany, Belgium and Spain, 66% in Italy and Portugal and one in two businesses in the UK.

Higher energy costs are also considered as a hindrance, especially by businesses in Germany (close to nine businesses in ten regard the current level of energy prices as a negative factor and the same proportion expects further increases in 2006), while opinion in France and the UK is more mixed, although negative sentiment predominates.

• Competition from developing countries

Competition from developing countries is a major concern shared by business leaders right across Europe, particularly in Belgium and Italy.

New EU member states and China are among the most feared competitors. What's more, this concern is regarded as the main threat by French manufacturing companies.

In the opinion of business leaders, productivity gains are the most important way of responding to this threat. Other important ways of addressing this threat are improving international positions and the strategy used to select subcontractors and business partners.

The threat posed to domestic employment is emphasised to a greater extent in Belgium, Portugal and, above all, in Spain (28%, 33% and 48% respectively of businesses anticipate payroll reductions in the short or medium term).

• Changing labour regulations

Aside from stiffer competition from developing countries and higher commodity and energy prices, the other major concerns shared by European business leaders comprise changes in labour regulations. This concern is particularly tangible in France and the UK.

In Europe, the average payment period stands at two and a half months. Everywhere except Spain, the length of payment periods is tending to increase. This process is being driven by an increase in late payments, rather than by a change in contractual payment terms. Payment periods have increased substantially in Italy, where the average period now stands at over three months (101 days) compared with two and a half months last year.

Conversely, payment periods are shortest in Germany and the UK at 52 and 51 days respectively. In France, Belgium and Spain, they now stand at between 62 and 67 days. They average 83 days in Portugal.

The public sector has been instrumental in the increase in payment periods, especially in Italy, but also in Belgium and to a lesser extent in Germany and Spain.

In France, average payment periods have been relatively stable since 2001 (67 days on average). Average payment periods seem to be longest in the construction sector at 68 days, compared with 61 days last year, and at 65 days across all sectors combined.

Note also that one in five businesses expects payment periods to get longer and one in ten expects them to shorten over the coming year. Expectations of longer payment periods are more prevalent in the transportation sector (23% of businesses) and less common in the construction sector (14% of businesses).

Even though the majority of business leaders surveyed do not anticipate any change, the financing requirements of European businesses are generally on the increase. An average of one in four businesses states that they are tending to increase, as opposed to 10% who indicate the contrary.

The solutions adopted to meet this requirement vary from country to country. In Germany (42% of SMEs) and the UK (56%), businesses primarily use overdrafts and then longer supplier payment periods. Italy is the country that makes the greatest use of discounting (57%).

In France, the proportion of businesses anticipating an increase in their financing requirements is highest in the manufacturing and transportation sectors at 31% and 27% respectively. Conversely, the percentage is lowest in the construction sector at 19%.

Supplier payment periods are widely used as a way of plugging financing requirements according to 42% of French businesses (49% of construction and 44% of manufacturing companies). Last year, 35% of French businesses applied this method.

In Europe, 74% of businesses are directly exposed to the risk of unpaid bills. On average, unpaid bills account for 0.7% of their sales.

Businesses are worst affected by these risks in Germany, with 96% of them experiencing unpaid debts in 2005 (compared with 78% in 2004). On average, they account for 1.1% of sales, compared with less than 1% in the other countries.

Conversely, the risk of unpaid bills was the lowest in France, with just six out of ten businesses experiencing unpaid debts. Businesses with 50 or more employees and retail sector businesses had the greatest exposure to unpaid bills (76%). In Italy, the proportion of businesses experiencing unpaid bills posted a significant decrease, dropping from 82% to 72%.

European businesses charge interest on late payments, but practices vary from country to country. In Germany and Belgium, this practice is very common, with 54% and 39% respectively of businesses charging late-payment interest after the due date.

It is far less common in the Mediterranean countries (25% of businesses in Italy and Spain, 22% in Portugal) and even less widespread in France and the UK (11%).

About Eurofactor

Eurofactor is the French market leader in factoring and Europe's largest integrated factoring network. A subsidiary of Crédit Agricole, Eurofactor supports the growth of all businesses in France and abroad by helping them to build the receivables management solutions best suited to their business sector, size and customer profile, notably through European Pass, Eurofactor's pan-European service range.

For further information:

Nathalie PAQUET
Nathalie.paquet@groupe-eurofactor.com

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