01/31/2019

Cracks in the façade: What divisive global politics means for business

By George Stylianides, PwC Global Risk Consulting Leader, PwC UK

 

The ties holding together the international order have frayed badly in recent years. Debates that once seemed settled—around globalisation, trade and the free flow of information, goods and people—have erupted again with a vengeance, threatening to upend everything from global economic growth to corporate supply chains and sourcing strategies. Around the world populism and nationalist sentiment are on the rise, stoked by political leaders whose views and policies threaten to destabilize the pillars of international trade and development. In light of these trends, many business leaders have revised their growth estimates sharply downward, and the organisations they lead have turned inward in search of revenue growth rather than outward toward new markets and alliances. Ironically, those moves may hasten the onset of the recession that many business leaders see over the horizon.

CEO_Survey_Chart_ART_v7_Twitter_3Executives’ newfound sense of caution is apparent in the responses to PwC’s latest Global Annual CEO Survey, which reveal sharp declines in business leaders’ optimism about global GDP growth and their own organisations’ revenue prospects in 2019 and beyond. The main threats to growth, according to CEOs, aren’t terrorism or climate change, both of which tumbled down the survey’s rankings of leading risks. The biggest worry points—over-regulation, trade conflicts and policy uncertainty—relate to the ease of doing business around the world. And just when CEOs are in pressing need of insightful analysis to inform their strategic decisions, they face chronic and growing shortages of skilled talent to extract value from the data inundating their organisations. Those results chime with the conclusions of a recent top risks report from the Eurasia Group, an advisor to investors and business leaders on political risks and opportunities in foreign markets.

The geopolitical crosscurrents discussed in both reports will have wide-ranging impacts on key business priorities. In a new blog series, PwC’s risk specialists examine how political forces are influencing business decisions. In this first instalment, we analyse CEOs’ views of the leading risks they face in 2019. In subsequent posts we’ll consider the fractious state of relations between China and the U.S., the world’s two biggest economies; examine the effects of rising nationalism on supply chains and overseas operations; and review the threats to vitally needed innovation, which depends on the free flow of people and ideas across borders. We hope this blog will be of value to business leaders, helping them navigate today’s treacherous geopolitical seas.

 

Rising tensions cloud the global outlook

CEO_Survey_Chart_ART_v7_Twitter_2CEOs have seen the discord coming for a while. In recent editions of PwC’s Annual Global CEO survey, large majorities of respondents have consistently said the world is moving toward nationalism and devolved nations and fragmenting into regional trading blocs. Those trends are darkening business leaders’ views of their companies’ growth prospects and those of the overall economy. True, 42% of CEOs believe global economic growth will improve over the next 12 months. But 28% expect growth to decline, up from 5% the previous year—a record increase in the ranks of the pessimists. Their confidence in the growth prospects of their own companies over the next one- and three-year periods has also faded.

Respondents to our latest survey also reordered their rankings of the most significant threats to business. Terrorism, ranked as the second-most severe threat in last year’s survey, has fallen to 23rd, while threats related to government policy and performance have assumed new prominence. Over-regulation, policy uncertainty, trade conflicts, geopolitical uncertainty, protectionism and populism have muscled their way onto the list of the top ten threats that have CEOs feeling “extremely concerned.”

Those concerns are reshaping CEOs’ operating models and growth strategies. A near-majority (45%) of respondents who report they are “extremely concerned” about “trade conflicts” are adjusting their supply chains and sourcing strategies, and 25% are shifting their growth strategies to other territories. An additional 22% are delaying capital expenditures. CEOs of China-based companies have been far more active in making such adjustments than their U.S. counterparts.

CEO_Survey_Chart_ART_v7_Twitter_1Amid all the external turmoil, CEOs are looking inward for growth, with 77% of CEOs surveyed saying that their organisations are planning to reap operational efficiencies to drive revenue improvement; 72% are placing their faith in organic growth. Only 37%, by contrast, are looking to new markets to drive growth; the same percentage are banking on M&A.

Capability and talent gaps threaten to hinder that planned growth. For example, 94% of CEOs said that data about customers’ and clients’ preferences was “critical,” yet only 15% said the data they receive is “comprehensive.” What accounts for that yawning gap? Talent shortages are a key reason. Nearly two-thirds (62%) of CEOs surveyed say that it has become more difficult to hire workers in their industry, up from 42% in 2012, and 55% say that a lack of available talent has impaired their ability to innovate effectively. And 54% of respondents say that a lack of analytical talent is the primary reason that the data they need to make key business decisions is inadequate or that they do not receive that data.

 

As the big powers face off, nationalism gathers strength

Image 2 - Blog v1.1CEOs will see many of their concerns reflected in the Eurasia Group report titled “Top Risks 2019.” This sobering document declares that “the overwhelming majority of geopolitical developments that matter…are now headed in the wrong direction.”[1] Take the state of U.S.-China relations. Even if the two economic superpowers’ disagreements about trade and economic policy are resolved, the report states, “something more fundamental has broken in the relationship between Washington and Beijing that can’t be put back together.” The mutual suspicion that marks the relationship has intensified as President Donald Trump’s foreign and economic policies have grown more confrontational. China’s response so far has been relatively muted and conciliatory, but with nationalism on the rise at home, President Xi Jinping and his government are under pressure to assume a more aggressive posture.

Meanwhile, Europe’s “populist and protest movements are stronger than ever,” [2] the report asserts. Elections to the European parliament will take place in May, creating “an opportunity for right-wing eurosceptics to become an imposing force in the parliament—perhaps the second-largest group.” Their presence will make it more difficult to reach consensus on key issues such as migration and trade and undermine attempts to react cohesively to economic or political shocks. As individual countries such as Austria, Hungary, Italy and Poland pursue go-it-alone strategies, supply chains could be disrupted, and local business and investment policies could make doing business on the Continent more difficult and complex.

Perhaps most ominously, the report’s authors say the world is headed toward “a global innovation winter—a politically driven reduction in the financial and human capital available to drive the next generation of emerging technologies.”[3] To discourage cyber mischief and industrial espionage, some countries are throttling foreign suppliers’ access to key industry sectors and tightening regulations over the use of consumer data. Protectionist barriers in some territories are rising as governments seek to advance local tech champions at the expense of established global giants. And more stringent immigration policies are inhibiting the flow of talent to key innovation centres. Each of these trends is manageable on its own; in concert they threaten “to cast a pall over global innovation.”

Such is the parlous state of the business world in 2019. In coming posts to this blog, we’ll take a closer look at how these developments will affect how business is done in the coming year and beyond. Hang onto your hats, it’s going to be a bumpy ride.

 

 

[1] [2] [3]All quotes in these paragraphs are from “Top Risks 2019,” Eurasia Group

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