Calm Seas and Headwinds
It’s been a torrid start to 2017, yet the global growth outlook is brightening, and forecasts are generally better than expected. Recently, Dun & Bradstreet’s Global Bankruptcy Report revealed a general decline in corporate bankruptcies and a positive global growth trajectory of 2.7% in 2017, up from 2.3% in 2016.
Almost every year since the financial crisis, a lack of growth engines, fiscally limited governments, and a general pattern of overinvestment have played a part in establishing a sluggish economic pattern overall. Now, we are seeing a record low in corporate failure rates.
In the midst of many volatile global political conflicts, it seems on the surface that there’s a new beginning for business growth and new hope for the global economy. But, beneath the positive ripples of this apparent acceleration in momentum, the global economy faces both systemic and exogenous risks to doing business.
The Top 5 Global Economic Risks
For businesses operating globally, taking advantage of new opportunities means keeping an eye on the geopolitical and economic landscape. Dun & Bradstreet has identified five global risks for business leaders to monitor in 2017:
Risk #1: Protectionist Global Trade Policies
Our deeply interconnected global business relationships are affected by global trade policies. Policies that negatively deter positive global interaction instead of encourage it, pose enormous implications for global supply chains and customer networks.
Globally, the temptation to close borders and remain insular is strong. As we examined in Winners and Losers from Shifts in US Trade Policy, economic theory and experience offer little reason to believe that a move toward increased protectionism will benefit the United States. Positively, President Trump’s recent interaction with Chinese president seems to have had the effect of increasing positive relations. Yet, populism remains alive and well in other parts of the world, and a tendency toward deglobalization poses a major risk to global businesses.
Risk #2: Geopolitical Risks
Volatility in North Korea, Syria, and other conflict-ridden areas poses two main risks to businesses globally: supply chain impact and financial channel risk. Given the global nature of modern supply chains, the resulting instability could disrupt key components of production. Secondly, any geopolitical instability potentially leads to investor angst. Investors are likely to move assets from affected regions (e.g. emerging market currencies) and pile them into safe haven assets, primarily the dollar. This pushes up the price of the dollar, which could hurt our export-dependent industries, e.g. manufacturing.
Additionally, elections in four key European economies and the rise of populism, beginning with the French and followed with the UK, Italy, and Germany, might pose a risk to business, although we do not anticipate that this risk will be significant. Given the importance of these economies for the EU, the election outcome will have significant repercussions for the EU’s future.
Risk #3: US Political Divergence
Divergent views on economic policy may cause additional risks to businesses, particularly within the US. Interest rates are concerning, as US Federal Reserve continues to normalize monetary policy by raising interest rates, while other major central banks stay at zero.
Despite the steady fundamentals of the US economy, at the end of March, Dun & Bradstreet downgraded the United States’ Political Environment Outlook (one of the sub-categories of the overall country risk score) from amber to red, indicating that political risk is now a bigger impediment to operating risk. The recent failure of the government’s efforts to repeal Obamacare show that there are considerable divisions within the Republican party that need to be addressed by future policy measures to ensure full passage of those. In other words, total Republican control of both the executive and legislative branch can no longer be relied upon to prevent policy gridlock. This has downside risks for near term economic policy, and could weigh on business confidence, at least temporarily.
Businesses, and consumers to some extent, have been optimistic about forthcoming economic policy from the Trump administration since the election. In particular, business sentiment has been soaring in anticipation of corporate tax reform, and deregulation leading to reduced to cost of operations. But few actionable details have so far been released on these policy measures. The government needs to provide consistent, unanimous, and more detailed signals to help businesses plan their strategies in anticipation of the new policies. A delay in obtaining such information, or mixed messages could dent the wave of optimism among businesses, and lead them to hold back on hiring and investment, deflating the momentum of the economy.
Risk #4: The Impact of Oil Prices and OPEC
Oil prices affect businesses differently. Countries importing oil generally benefit from lower oil prices, as do consumers. For companies in exporting countries, a lower oil price could be an economic risk. At present, the OPEC production agreement is holding but only because Saudi Arabia has cut its production more than it agreed. This is keeping upward pressure on prices. However, other countries are not in unanimous compliance. Furthermore, with oil prices staying above the USD50/b mark, US oil shale is again ramping up, which is keeping a lid on prices.
The strong US dollar is also acting as a brake on prices, as is the fundamental short to medium term structural over supply issue. Much will depend on whether Saudi Arabia is willing to keep acting as a swing producer. History tells us it will not keep doing this in the medium term (see the 1980s when it got fed up and oil prices plummeted as it opened the spigots). However, in the short term Saudi Arabia wants higher oil prices because it wants to launch an IPO for part of the state-owned ARAMCO next year. Overall, we are betting that downward pressure will win out in 2017.
Risk #5: The Expectations of Soft Data vs. the Reality of Hard Data
Lastly, the actual reality of US policy may fall short of expectations in relation to employment and investment globally. There may be a risky disconnect between soft data (sentiment, surveys, and polls) vs hard data (GDP, inflation, capex data). Given that US growth is expected to be a major driver of the global acceleration in the near term, any disappointment will prematurely snap the US growth and be detrimental to global growth.
For the moment, the economy remains solid, and even without immediate support from a sizable stimulus package, we forecast real GDP to grow 2.2% in 2017, up from the disappointing pace of 1.6% in 2016. With the help of a fiscal stimulus, we expect growth to accelerate to 2.6% in 2018. Consumer spending remains the main driver of the economy, which in turn, is being supported by a robust job market. The unemployment rate dropped to 4.5% in March, the lowest it has been since May 2007. The job market suffered a hiccup in March as payroll gains fell to 98,000, well short of expectations (and our own forecasts). Weather and seasonal effects played a role in the slowdown in March. As always, we caution not to attach too much significance to a single, monthly data point. Given the March number and revisions, average job gains in the first 3 months of 2017 still stand at a robust 178,000. Clearly, the job market is solid but at the same time, has room to run and absorb more slack.
Data & Relationships Provide Opportunity amid Risk
Global businesses must remain cognizant of these risks, using data and insights as maps to navigate them.
As we see global risks unfolding, there are also new opportunities in this new economy. Companies operating in the globally interconnected political environment should be cognizant of these risks, without living in fear. While it may feel as if the world is growing more disconnected, the connection points we now have through data enable us to forge stronger relationships across borders, in spite of growing risk.
There are risks to being globally-minded today, but there are more opportunities.