The Global Risk Matrix Q3 2016

Dun & Bradstreet Highlights Five Emerging Risks in our Global Top Ten

The latest Dun & Bradstreet Global Business Impact score highlights a further worsening of risks for businesses across the world. The nature of risk is changing rapidly, with five new entries among our top ten risks. Two of these new risks relate to the UK’s surprise decision to leave the EU.

Key Risks—Conditions Still Worse than Pre-Financial Crisis

Dun & Bradstreet’s Global Business Impact (GBI) score for Q3 2016 worsened for a second consecutive quarter to 243 (out of a maximum of 1,000) from 235 in Q2. Nevertheless, the average of 236 for the first three quarters of 2016 is an improvement on the same period in 2015 (254.67) and 2014 (258.0). This confirms our view that, despite the gloomy headlines, business conditions in general are better than in recent years; however, conditions are still worse than they were before the global financial crisis.

While investment is unlikely to respond in a noteworthy way, the biggest positive impact on the British economy could stem from the exchange rate channel.
Warwick Knowles, Economics & Global Risk, Dun & Bradstreet

Our top ten risks combine an assessment of: (i) the magnitude of the event’s probable effect on the global business operating environment, on a scale of 1 to 5 (where 1 is the smallest impact and 5 is the largest); and (ii) the likelihood of the event happening.

Previously the Global Risk Matrix (GRM) was based around risks emanating from the seven regions that Dun & Bradstreet covers, but since Q1 2016 we have enhanced our matrix by adding pan-regional risks.

Five New Risks in the Global Risk Matrix

The Q3 2016 GRM has five new entries, highlighting that finance, procurement and supply chain teams across all sectors of business face urgent and ever-evolving risks in an increasingly complex and globalised world. The five new entries relate to:

  1. The UK leaving the EU, with limited spillover effects but high levels of short-term uncertainty (GBI of 30, out of a maximum 100)
  2. Increasingly frequent and more damaging cyber-attacks with global ramifications (GBI of 28)
  3. A strong La Nina weather phenomenon affecting the Pacific region’s agricultural sector and infrastructure (22)
  4. Widespread public discontent in Latin America disrupting the rule of law and further impairing the business environment (20)
  5. Brexit prompting a significant downturn in Europe (20)

Of the five risks that remained in the GRM from Q2 2016, the GBI of one worsened, two improved, and two remained the same. Specifically, the likelihood of the migrant deal between Turkey and the EU collapsing increased from 40% to 45%, raising its GBI from 24 to 27. Meanwhile, the likelihood of Chinese real GDP growth slowing to below 5% has decreased from 35% to 33%, lowering its GBI score from 28 to 26. We have also reassessed the global impact of the TTIP negotiations collapsing, changing its impact score from 3 to 2 (although maintaining its likelihood at 50%), reducing its GBI from 30 to 20. Finally, in terms of the stable GBI scores, the risks associated with default contagion in China leading to state rescues of the mid-tier banks remains at 30; and the GBI associated with a perceived rise in global uncertainty and weak growth in the rest of the world serving to recharge the US dollar, increase market volatility and heighten risk associated with the emerging economies, remains at 20. 

China and the UK Spawn the Worst Risks

China’s situation and the UK’s vote to leave the EU each have two risks associated with them in the top ten. In joint top place, with a GBI of 30 (the same as in the previous report), is the threat of possible default contagion in China. Should this happen it would trigger additional problems in the financial sector, necessitating state rescues and emergency capital issues, particularly for mid-tier banks. Among the upstream industries that currently appear 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 second China-related risk, which is in fifth place overall, with a GBI of 26 (down from 28 in the previous report), relates to default contagion from industry, property and local government: in this instance the slowing of China’s real GDP growth to below 5% would seriously affect the growth prospects for many emerging markets.

Dun & Bradstreet is maintaining its real GDP growth prediction of 0.4% for next year (below the Bank of England's revised 0.8% forecast), as well as our 2.4% inflation forecast.
Warwick Knowles, Economics & Global Risk, Dun & Bradstreet

The other joint top-place risk is associated with the UK’s ‘Brexit’ vote. Here, we assign a 75% likelihood to the UK leaving the EU in an orderly way, with limited spillover effects. Nevertheless, short-term uncertainty about the post-Brexit relationship between the UK and the EU will still impact on the global business environment. Also related to the vote, and also a new entry, is our concern that Brexit could lead to a significant downturn in the wider region, hitting global demand. We have assigned a likelihood of 25% of this happening, with a GBI score of 20, putting this risk in equal seventh place.

The second-highest new entry, and in third place overall, is related to the growing dangers created by cyber-crime. We are concerned that rapidly growing cyber-dependence and connectivity will lead to increasingly frequent and more damaging cyber-attacks, with ramifications for doing business. We assign a 70% likelihood to this outcome, with a global impact of 2, giving a GBI score of 28.

In fourth place overall is the second pan-regional risk. 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 increased the likelihood of this happening from 40% to 45%, with a consequent increase in the GBI from 24 to 27.

Another new entry is in sixth place with a GBI score of 22. This relates to a strong La Nina weather phenomenon in H2 bringing heavy rains and prompting severe storms and flooding that negatively affect the agricultural sector and infrastructure around the littoral countries of the Pacific Ocean.

The final new entry, which emanates from Latin America, is in equal seventh place with a GBI of 20. We are concerned that widespread public discontent across the region in response to the collapsing regional economy will lead to a sharp rise in violent anti-government protests that disrupt the rule of law and further impair the already weak business environment.

Also in equal seventh place, with a GBI of 20 (down from first place and a GBI of 30 in the previous report), is the potential collapse of the TTIP negotiations between the US and the EU after the US presidential election in November; neither candidate appears to support the agreement. 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.

Finally, with a GBI score of 20 (the same as the previous report) 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.

Business Environment Remains Challenging

The Dun & Bradstreet Global Business Impact score for Q3 2016 highlights that risks facing businesses have increased somewhat in the quarter, and also that although they are still elevated, they are 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.

For more information about our Country Insight Reports or how we can integrate country and company data visit www.dnb.co.uk/country-insight.

 

 

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