By Warwick Knowles, Senior Economist at data and analytics firm, Dun & Bradstreet
The coronavirus is having a significant economic impact around the world and widespread lockdowns and disruption means that businesses are facing a challenging environment and a global recession. Across industries, jobs are at risk and in the UK, GDP has contracted by the biggest drop on record
Indeed, the risk for business has never been so high. For the second successive quarter, Dun & Bradstreet’s Global Business Impact score, which ranks the biggest threats faced by businesses based on potential impact, remains at its highest-ever level. This indicates the high level of uncertainty facing businesses that operate cross-border.
While the outlook is bleak, foresight has never been so important. Identifying future risk will be crucial as businesses look to operate in the most testing of circumstances. If they successfully navigate through this pandemic-induced storm, the sea may just become calmer at the other end.
New risks enter the top ten
Highlighting the evolving impact of the coronavirus outbreak on economic conditions and thus the ever-changing global business environment, five of the six new entries in our Q3 2020 report are directly related to the coronavirus pandemic. The other new risk is related to the worsening political and economic crisis in Lebanon.
The six new risks identified include:
- The re-establishment of forced business shutdowns and a persistent rise in Covid-19 cases in the US severely saps global demand for goods and services and undermines remittance flows, weakening the recovery and prolonging the global recession
- Global equity valuations deteriorate as it becomes clear that depressed productivity levels in urban areas (due to indefinite social distancing) mean that leading economies will struggle for years to return to normality
- A new Covid-19 wave in Spain, France and other European markets requires another round of lockdowns, undermining business conditions across the EU
- Elevated delinquency rates for Commercial Mortgage-Backed Securities (CMBS) in the North American lodging and retail sectors lead to bankruptcies and far-reaching consequences for multinational investors
- Failure to contain coronavirus outbreaks in the leading copper-producing countries – Chile and Peru – forces an extension and/or tightening of quarantine measures, leading to a decline in global copper supply and driving prices higher in H2
- Political instability in Lebanon encourages active intervention by external actors and encourages Hezbullah to take aggressive action against Israel, triggering further regional instability
The overall top ten risks for Q3 highlights the nature of the coronavirus pandemic, with three of the risks associated with it being pan-regional, two stemming from North America, and one each emanating from West and Central Europe and Latin America. Of the three non-Covid-19 risks, two originate in North America, and one in the Middle East and North Africa.
The impacts of the coronavirus pandemic are spread across different types of risks: markets (3), economic growth (3) and politics (1). The three non-Covid-19 risks are all political in nature. The widespread nature of the risks highlighted in this report reinforces the fact that finance, procurement and supply-chain teams across all business sectors need to combat the impacts of an increasingly complex and globalised world.
Market concerns undermine risks
Three of our top ten risks relate to how the Covid-19 pandemic will undermine markets, lowering confidence and raising risk premia, and thus undermining prospects for doing business well into the medium term. In first place is the pan-regional risk that the global pandemic – which is affecting emerging-market and advanced countries alike with its impacts on mortality rates and the global economy – brings an unprecedented fiscal emergency, damaging all grades of sovereign creditworthiness for the medium term.
There is also a concern that elevated Commercial Mortgage-Backed Securities (CMBS) delinquency rates in the North American lodging and retail sectors could lead to bankruptcies and far-reaching consequences for multinational investors.
The third market-oriented risk is the worry that the failure to contain coronavirus outbreaks in the leading copper-producing countries – Chile and Peru – forces an extension and/or tightening of quarantine measures, leading to a decline in global copper supply and driving prices higher in H2.
Geopolitical and political concerns
Four geopolitical/political risks feature in the top ten risks for businesses operating in the global environment. The first geopolitical risk is in second place overall. This risk, emanating from North America, is that the continuation of protective trade policies driven from the US puts additional pressure on global supply chains, further altering existing trade relationships while forcing continued transformations to existing supply chains.
In fourth place is the concern that US-China relations deteriorate as the US seeks to assign ultimate responsibility for its economic disaster, thus impeding global public health co-operation and damaging equity values through the return of higher geopolitical risk premia.
The third political risk, in equal fifth place, is pan-regional in nature. The fallout from Covid-19 could raise unemployment significantly, ushering in populist governments with nationalist characteristics in the democracies and increased anti-government protests in authoritarian countries; with both impacting negatively on the global business operating environment.
The final geopolitical risk is in equal ninth place and emerges from the Middle East and North Africa: we are concerned that political instability in Lebanon encourages active intervention by external actors and encourages Hezbullah to take aggressive action against Israel, triggering further regional instability.
Risks curtailing economic growth
The final three risks in the Q3 top ten are related to the impact of the Covid-19 pandemic on curtailing economic growth, thereby undermining the business operating environment. The first of these risks is that the re-establishment of forced business shutdowns and a persistent rise in Covid-19 cases in the US severely saps global demand for goods, services, and remittances, weakening the recovery and prolonging the global recession. This new entry, emanating from North America, is in equal third place.
The second risk associated with economic growth is also a new entry at equal fifth, and is pan-regional in nature. This risk is that global equity valuations deteriorate as it becomes clear that depressed productivity levels in urban areas (due to indefinite social distancing) will prompt leading economies to struggle for years to return to normality.
The final risk is that a new Covid-19 wave in Spain, France and other European markets requires another round of lockdowns, undermining business conditions across the EU. This new entry is in seventh place.
Business environment risk remains at record heights
Dun & Bradstreet’s Global Business Impact score for Q3 2020 shows that the risks confronting businesses remain at the record-high first experienced in Q2. The elevated level of risk has been driven mainly by the outbreak of the novel coronavirus: the outbreak illustrates how unexpected events can suddenly worsen the risk environment for businesses operating cross-border.
The geographical spread and diversity of risks in our top ten underlines the importance of taking a broad approach to mitigating risks. Business decision-makers will need to have contingency plans in place for the sudden disruption of seemingly secure supply chains.