As US policy under the new administration unfolds, coupled with ongoing uncertainty about the outcomes of last year's UK referendum to leave the European Union and numerous national elections in Europe, executives are mixed in their outlook for the global economy.
According to McKinsey's Global Survey on globalisation, most executives surveyed believe, "Geopolitical, political, and macroeconomic instability ... will affect their companies, with decidedly negative implications for profits."
Executives said geopolitical risks were more of a concern to their firms today than they were five years ago. Despite this concern, fewer than one-third of all respondents indicated that, "an understanding of these factors is extremely or very well integrated into overall strategy."
Given the anticipated risks on the horizon, finance chiefs may need to adopt a flexible and responsive approach to be able to operate effectively in this environment.
John Meacock is professional services firm Deloitte's chief strategy officer (CSO). He says despite recent events in world markets, the economic growth forecast for the major economies and regions is positive.
According to the Organisation for Economic Co-Operation and Development (OECD), the forecast for world economic growth last year was 2.9% and is projected to rise by 3.3% in 2017. For Australia, the comparable figures are 2.7% and 2.6%, for the US they are 1.5% and 2.3%, and for the UK they are 2.0% and 1.2%. The OECD projected GDP growth of 6.7% last year for China and this year growth of 6.4% is expected. In Europe, excluding the UK, these numbers are 1.7% and 1.6%.
“The potential for lower taxes in the US and higher spending on infrastructure is driving the US economy higher at a time when it is already rising. That is creating global growth and opportunities for China, which creates opportunities for us. It's positive news for 2017," Meacock says.
One potential downside could be more protectionist strategies in the US, for instance tariff barriers. “But the higher US dollar against the Chinese currency is stimulating Chinese exports and growth. This is positive for the Australian economy," Meacock says.
However, structural issues in the Chinese economy could hinder local growth: “Overbuilding is the big challenge in China. They've spent a lot of money building infrastructure and they really have a debt issue. If there is a stumble in China that can cause a problem for us in terms of the domestic housing market and our export flow into China," says Meacock.
“Although we keep talking Trump, the big concern is China's economy holding up. China is pumping money into their economy and devaluing the yen. This should stimulate demand for our services and resources," he adds. The increase in commodity prices as well as improving export figures could also help drive Australian businesses throughout 2017.
Meacock says the UK’s referendum to leave the EU should not have a material impact on the region's economies.
“The response has been a fall in the pound, and The Bank of England and the Chancellor of the Exchequer are freeing up spending, which is helping support growth in the UK. But Brexit won't have much impact overall; the issue is the lack of consumer confidence."
“We argue the UK in the long term may be less prosperous than it would have been if it stayed in the Eurozone. But the drop in the currency will actually help the UK in the short term," he adds.
While global markets may be challenged over the next year, the fundamental data indicates improving global economic conditions can continue for the foreseeable future.
Says Meacock: “The global outlook is much more positive than we've seen recently. While risks remain, we anticipate economic growth will continue to improve throughout 2017."
- Tax cuts and infrastructure spending in the US could support global growth in 2017. However, protectionist US trade policies could moderate this effect.
- Amid potentially divisive national elections in Europe, economists expect flat growth in 2017.
- China's attempts to support its economy may be positive for Australian exporters.