Political shocks shake up business’s risk perceptions

Global news events are prompting business leaders to constantly reassess the risks most relevant to their operations. The political shocks of Brexit and the U.S. election, for example, were considered signals for a move to more protectionist policies and changes to business operating environments.

New insights into how political shifts and current events influence business perceptions of risk have emerged from the early findings of the World Economic Forum’s latest Executive Opinion Survey (EOS).

As part of the Survey, more than 12,400 business executives in 136 countries were asked to identify the five biggest risks to doing business in their respective countries.

The full worldwide responses to this question will be published in January 2018¹ alongside the new Global Risks Report. However, the newly available survey data from the Forum provides an early glimpse of the risks that are remaining or rising on the agendas of businesses across the world (to find out more please click here). In key highlights:

• Unemployment (or underemployment) remains the biggest global risk as it was last year
• Terrorism is perceived as the greatest risk in the U.S. (up from 3rd last year) and the second greatest in Germany and France (second and third respectively last year)
• Fiscal crises and asset bubbles are now viewed as the UK’s joint biggest risks following the Brexit vote. (They have replaced cyber-attacks, which were number one last year.)
• Europe’s three key risks are unemployment, failure of national governance and fiscal crises
• Failure of national governance is the main risk in Latin America and the Caribbean, while cyber-attacks rank first in East Asia and the Pacific

Terror tops list of U.S. business risks

The International Monetary Fund (IMF) recently downgraded its U.S. growth forecast for 2017 to 2.1 percent and the government will soon have to raise the national debt ceiling. But the world’s biggest economy remains fundamentally strong and as a result its businesses rank economic risks far lower than their peers from most other developed nations in the EOS. Three of the top five concerns in the U.S. are technological risks: cyber-attacks, misuse of technology and data fraud or theft. However, it is the threat of terrorism, which is now viewed as the biggest business risk in the U.S.

John Scott, Chief Risk Officer for Commercial Insurance, Zurich Insurance Group, said: “I think that tells you something about the sensitivity of society and the business community to the current spate of terrorist attacks on western societies. Combine that with an often, nationalist and populist political response and it is not surprising to find an increased ranking of terrorism risk.” However, Dr Scott said the findings also reflected the U.S.’s relatively strong recovery from the financial crisis. “It is ten years since the credit crunch that marked the start of the financial crisis and it is fair to say that U.S. took some tough medicine, especially in financial services. With rigorous stress testing, carefully judged strengthening of bank balance sheets and maintaining a flow of credit to the real economy, the U.S. banking system is much less weak than in Europe as a consequence.”

Canada could be the fastest-growing G7 economy this year but it is more concerned than the U.S. about financial fundamentals; fiscal crises (4th) and asset bubbles (2nd) remain among the leading risks. The future of the North American Free Trade Agreement (NAFTA), which the U.S. Administration is seeking to renegotiate and has said it could abandon, could be a rising risk for many companies in the region.

Economic risks still haunt Eurozone

Eurozone growth projections have improved this year yet economic risks remain at the forefront of business leaders’ minds in most of the region other than Germany. While the number of jobless continues to fall gradually, unemployment or underemployment is still seen as the top risk in Europe; at the country level, it is also first in France and second in Italy – behind the risk of failure of financial mechanisms or institutions.

Emmanuel Macron's presidential victory and his partnership with Angela Merkel have reduced the threat of populism for now. But profound social instability is still perceived as a major risk – third in Italy and fourth in Germany and France. Large-scale involuntary migration is also a concern in Germany, Italy and Switzerland.

“The consequences of the 2008 crisis are still with us in Europe; many countries are highly indebted and the banking sector is still fragile,” said Dr Scott. “It just needs another political or societal trigger to reveal the economic vulnerabilities.”

Mr Macron views Brexit as an opportunity to enact reforms aimed at closer integration in the single currency area. Mrs Merkel has indicated she will support his vision for a common Eurozone budget and finance minister if she wins the election on September 24.

John Van Reenen, Professor of Applied Economics at the MIT Sloan School of Management, said such reforms would be positive but would not end financial risks. “High debt in places like Italy remains,” he said. “The key thing is structural reform to improve competition in labor and product markets as Macron proposes.”

Businesses wary of Brexit-related financial risks

Businesses in the UK are most worried about potential asset bubbles or fiscal crises, the latter jumping to joint first from sixth in last year’s survey. UK growth forecasts have been revised downwards and business groups have expressed concerns about the impact of post-Brexit immigration policy, with net migration already falling sharply.

“Migration and population growth drive GDP growth,” said Dr Scott. “People still feel the UK is a safe place to invest but uncertainty around the outcome of Brexit negotiations and the devaluation of the pound raise fiscal and financial risks.”

Many British businesses need to mitigate Brexit-related risks by developing different options for legal structures and operational choices to take account of potential future trade policy scenarios. “It’s frustrating and expensive. But that’s the kind of strategic thinking business needs to deal with the uncertainty,” Dr Scott said. European companies heavily exposed to the UK market and British firms concerned about international trade might need to take similar measures, he added.

The risk of reversing globalization

Failure of national governance is a major risk, rising from fourth to third globally and ranking first in Latin America and the Caribbean. Businesses in Brazil, where corruption allegations have reached the top of government, are among those most concerned. In East Asia and the Pacific, cyber-attacks are seen as the main risk followed by asset bubbles and fiscal crises. But in China, natural catastrophes rank first ahead of deflation – a risk with potentially wide-ranging global consequences.

Business decision-makers and risk managers have rarely faced uncertainty on so many fronts. As the IMF’s last Global Financial Stability Report noted, political and policy uncertainty are high and greater protectionism could hit global growth and trade. Professor Van Reenen warns that the possibility of globalization going into reverse with damaging consequences is real. “Business can mitigate the risk by being more forthright in their condemnation of Brexit and Trump,” he said. “Given the uncertainty, the rational response is to delay hiring and investment in order to ‘wait and see’ how things develop.”

An April 2017 report² by Zurich and the Atlantic Council found a resurgence of globalism rather than a return to protectionism would have a cumulative benefit for global economic output of USD $44 trillion by 2035.

The global economic upturn provides some grounds for optimism. But the diversity of key risks shows that companies need to make strategic plans for many possible scenarios if that optimism is to be sustained. 

Key takeaways

• Businesses are constantly reassessing their perceptions of risk in response to news events and as part of their strategies for adapting to the constantly changing external operating environment.
• The fallout of the financial crisis is still evident, especially in Europe, and companies will want to see structural reforms in key markets to help prevent renewed fragility.
• People still feel the UK is a safe place to invest but considerable uncertainty remains around the outcome – and impact - of Brexit negotiations. British businesses need to mitigate Brexit-related risks by developing different options for legal structures and operational choices to take account of potential future trade policy scenarios.
• With uncertainty on many fronts and a risk of rising protectionism in the U.S. and elsewhere, businesses need to apply strategic thinking to their planning and risk management, mitigating not only the immediately apparent risks but those that may be interrelated regionally, or globally.

¹Since 2006 the World Economic Forum has provided world-leading analysis of the evolving global risks landscape in its flagship Global Risks Report, produced in collaboration with strategic partners Marsh & McLennan Companies and Zurich Insurance Group. The full worldwide results will be published in January 2018 alongside the new Global Risks Report.

²Our World Transformed: Geopolitical Shocks and Risks. The report is part of a multi-year thought leadership effort by Zurich Insurance Group and the Atlantic Council’s Brent Scowcroft Center on International Security.