By Warwick Knowles, Senior Economist at Dun & Bradstreet
It’s no secret that it’s been a difficult three years for businesses. From sterling depreciation to new technologies changing the way we live and work, the risks posed to businesses have been exacerbated by the political turbulence felt around the world.
Brexit uncertainty, at least, seems to be abating. And with a majority Conservative government now instated, there is a sense of returning to business as usual in the UK… at least for now. For businesses that means an even sharper focus on the new challenges ahead – not only in Europe, but also in Asia and the United States.
In an increasingly globalised economy, it’s essential that businesses prepare for the threats they face worldwide – or risk damaging their profits and reputation.
Here are the top ten risks to businesses in 2020, as projected by our Global Business Risk Report (GBRR).
Risks at highest ever level
The Global Business Impact (GBI) score – which is calculated by assessing the effect of an event on the global business operating environment and the likelihood of that event happening – has worsened to its highest-ever level, following two quarters of marginal improvement. The Q1 score is now at an extreme level and – having trended upwards from an all-time low score only two years previously – the overall rise is indicative of the growing uncertainty facing businesses that operate across borders.
This quarter, in fact, there are four new risks in the global top ten list. All ten highlight how businesses are increasingly affected by threats overseas – with the most significant threats posed from Asia-Pacific and Western and Central Europe. Two of these risks are directly related to coronavirus. The four new-entry risks are:
- The coronavirus epidemic is not contained rapidly, leading to a paralysis of China’s economy
- The decline of the automotive sector has knock-on effects for global supply chains
- Coronavirus becomes a global pandemic affecting urbanised areas worldwide
- US-Iranian tensions lead to military conflict and the closure of the Persian Gulf, pushing up oil prices
Coronavirus risks elevated
The coronavirus outbreak highlights the impact that unexpected events can have on the risk environment for businesses operating cross-border. Three of the top ten risks in the GBRR – including the most significant risk overall – are underpinned by the threats posed by coronavirus. Whether it’s a case of the epidemic not being contained rapidly enough or global equity valuations collapsing, the coronavirus outbreak is the catalyst for an increase in business risk the world over.
For the former, not containing the epidemic quickly could lead to the paralysis of China’s economy well into Q2 and have stark consequences for China’s customers and suppliers globally as raw material prices crash and manufactured items experience shortages.
For the latter, it’s a case of a pre-existing risk changing focus. The risk of global equity valuations collapsing has drastically risen because of the coronavirus outbreak, as well as unexpected national and epidemiological security barriers to supply chains, trade and investment. Consequently, venture capital and commercial real estate markets in prime business centres could go into shock.
Another risk is that the coronavirus could become a global pandemic, affecting urbanised areas around the world – in emerging markets and advanced countries alike – with unforeseen consequences for mortality, politics and the global economy.
Politics takes its toll on industry, again
Four of the top ten risks in the latest GBRR are associated with politics. Two of these relate to President Trump’s recent acquittal in the US Senate’s impeachment hearings and, as a result, the highest-placed political risk emanates from North America and is in second place overall.
The risk relates to a fear that US-led trade wars will continue following the President’s impeachment acquittal earlier this year, and therefore negatively impact global supply chains. Another risk brought about by his impeachment acquittal is that it could intensify division among the dominant political parties in the US, making domestic and global policy cohesion much more difficult.
Then there is the political risk emanating from Western and Central Europe – specifically as a result of the potential election victories of far-right parties in Italy and France. In this instance, policy-making at the EU level would become increasingly complicated and undermine the overall operating environment for European businesses.
Finally, there is the concern that US-Iranian tensions could lead to actual military conflict between the two countries, resulting in the closure of the Persian Gulf to tankers and pushing oil prices above USD150 per barrel.
Structural impediments play a role
The risks relating to structural issues are much longer-term. The further decline of the automotive sector is a growing concern given that it is likely to cause ongoing problems for Europe’s industrial sector overall and, as such, have knock-on effects for global supply chains.
Technological threats, especially those posed by artificial intelligence, form the basis of the second structural risk. Threats of cyber-attacks, data theft, fraudulent activities by state and non-state actors, and the risks of outages of information and networks are rising continuously, and could all culminate in significant economic damage and geo-political harm.
Economic woes impact global projections
That the current expansion in the US has reached its peak is a major concern. In fact, this would likely lead to a turning point in the credit cycle and ultimately the US business cycle – in turn impacting global prospects. This is the only purely economic risk facing cross-border business operations this quarter.
Knowledge is power
The threats posing a risk to businesses derive from the same sources they always have done – from political unrest to economic downturn. It reiterates that business decision-makers do need to analyse, and then act upon, changes to the global business environment and the challenges they present, because business risk is constant.
After all, the geographical spread and diversity of risk related to politics, longer-term structural issues and economic developments make the business environment increasingly challenging.