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Global Risk Matrix Q2 2016

Global Risk Matrix Q2 2016

Marginal Worsening

The Dun & Bradstreet Global Business Impact (GBI) score for Q2 2016 worsened slightly to 235 (out of a maximum of 1,000) from 230 in Q1, which was the second lowest on record since we started the Global Risk Matrix (GRM). Although this reverses the improving trend experienced in the previous two quarters, the average for the past three quarters is the most positive on record. This confirms our view that, despite the gloomy headlines, business conditions are gradually easing almost one decade after the start of the global financial crisis.

Our top ten risks combine an assessment of (i) the event's probable magnitude on the global business operating environment and (ii) the likelihood of it happening. Previously the GRM was based around risks emanating from the seven regions covered by Dun & Bradstreet, but since Q1 2016 we have enhanced our matrix by adding risks that are pan-regional.

Six New Risks

Despite the relative stability of the score over the past three quarters, the Q2 2016 GRM has six new entries, highlighting that, in an increasingly complex and globalised world, finance, procurement and supply chain teams across all sectors of business face urgent and ever-evolving risks. The six new entries relate to:

  1. Default contagion in China requiring state rescues for mid-tier banks (GBI of 30 out of a maximum 100);
  2. The collapse of TTIP negotiations after the US presidential elections (GBI of 30);
  3. The migrant deal between the EU and Turkey collapsing (24);
  4. The potential British exit (Brexit) from the EU (21);
  5. Another hung parliament in Spain (20); and
  6. A return to a strengthening of the US dollar (20).

Of the four risks that remained in the GRM from Q1 2016, the GBI of one worsened, two improved and one remained the same. The likelihood of popular resistance to austerity rekindling the Grexit debate has increased from 45% to 55%, raising its GBI from 18 to 22. Meanwhile, the likelihood of Chinese real GDP growth slowing to below 5% has decreased from 50% to 35%, lowering its GBI score from 40 to 28. In addition, the likelihood of the weak oil price fuelling social unrest in oil-exporting countries, leading to global oil supplies being curtailed has fallen from 30% to 25%, lowering its GBI from 24 to 20. Finally, the GBI associated with civil wars in Iraq, Syria, Yemen and Libya spreading into neighbouring countries and giving radical Islamist groups further opportunities to launch economic jihad remains at 20.

Global Business Impact Score

global business impact score

China is Biggest Risk

Our top two risks both have a GBI of 30. We are concerned with the threat of possible default contagion in China. This would trigger additional problems in the financial sector, necessitating state rescues and emergency capital issues, particularly for mid-tier banks. Among those upstream industries currently appearing to have too much capacity are steel-making, ship-building, solar panels, coal, property and local government (and possibly cement, glass-making, aluminium and commercial real estate in the Yangtze River delta). A systemic collapse in the Chinese financial sector would curtail cross-border trade and investment opportunities.

The business environment remains challenging and business decision-makers need to be aware of the rapidly changing risk environment.
Warwick Knowles, Deputy Chief Economist, Dun & Bradstreet

Also in first place, is the collapse of the TTIP negotiations between the US and the EU, if Republican Donald Trump become US president in November. This would seriously undermine growth prospects for cross-border trade and investment. Indeed, it could have knock-on effects on other cross-border trade and investment deals.

In third place with a GBI of 28, down from first place in the previous report (with a GBI of 40), is our second risk emanating from the Asia-Pacific region. Again it is concerned with default contagion from industry, property and local government, but on this occasion slowing real GDP growth in China to under 5%.Chinese growth of below 5% would seriously impact on the growth prospects for many emerging markets.

The second pan-regional risk is a new entry at four. The potential collapse of a deal between the EU and Turkey would lead to a fresh influx of migrants into Western Europe, threatening both social stability in Europe and local supply chains. We have assigned a likelihood of 40% to this happening and a GBI of 24.

The importance of West and Central Europe to the global economy is highlighted by the inclusion of three risks, all associated with the stability of the EU, emanating from that region. At five, up from ten, in the previous report, with a GBI of 22 (up from 18), is our concern that continuing austerity in Greece will lead to popular unrest and a renewed calls for Grexit, threatening stability in the Eurozone.

The second stability risk is the threat of Brexit, which would necessitate re-negotiations of trade and investment treaties between the UK and the EU, and also between the UK and other countries. We have assigned a 35% likelihood to this happening, with a GBI of 21. The third risk associated with West and Central Europe, in seventh equal place with a GBI of 20, is a fear that a hung parliament in June election in Spain will increase political risk and stability in the wider EU.

In seventh equal with a GBI score of 20 are an additional two pan-regional risks. With a likelihood of 50%, is our concern that the perceived rise in global uncertainty and continued weak growth will see the US dollar strengthening again. This will add further volatility to global markets and also raise risk associated with emerging economies.

Down from fourth equal place with a GBI of 24, is our worry that the continuation of subdued oil prices could lead to further fiscal austerity, fuelling social unrest and political instability in authoritarian oil-rich countries in the Middle East, North Africa and Central Asia. Such instability would also be likely to curtail global oil supplies.

The final risk is that an increase in Middle Eastern and North African security issues arising from the civil wars in Iraq, Libya, Syria and Yemen could spread into neighbouring countries (a 25% likelihood), impacting not only local supply routes but also destabilising oil markets, with the potential to significantly raise global energy prices.

Business Environment Remains Challenging

The Dun & Bradstreet Global Business Impact score for Q2 2016 highlights that risks facing businesses have increased somewhat in the quarter, and although still elevated remain below their historic highs of 2014. The business environment remains challenging and business decision-makers need to be aware of the rapidly changing risk environment.

Top Ten Risks

top ten risks

For more information on Dun and Bradstreet’s Country Insight Solutions or contact countryrisk@dnb.com

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