According to QBE’s Unpredictability Index, political and economic trends have been the biggest drivers behind growing unpredictability for businesses over the past 20 years. Two of the most unpredictable years in the Index were 2010 and 2015, which followed the global financial crisis and European sovereign debt crises. In contrast, the most predictable year in the Index was 2005, which was characterised by a period of stable economic growth, low inflation and unemployment.
of large companies say they have been significantly affected by political factors
Mirroring the Index, our survey of business leaders found political risks are of most immediate concern to business and are perceived as the most unpredictable area at present (42% of large companies say they have been significantly affected by political factors). Economic events were found to have had the biggest impact on businesses, particularly as a result of the financial crisis and implications of Brexit (57% of large companies say they have been significantly affected by economic factors).
Since the financial crisis, key economic indicators and political events have become even more unpredictable, with outcomes that have bucked normal trends. The past decade, for example, has seen very low, or even negative, interest rates in major western economies – a situation that looks likely to persist for some time yet. In June, the US economy marked its longest period of expansion in its history – however, economists are now even questioning the sustainability of continual economic growth.
forecasted reduction in level of global GDP growth in 2020
As 2019 progressed, economic forecasts have been downgraded. In October, the IMF forecast global economic growth of 3% for 2019, a 0.3 percentage point downgrade from its earlier forecast in April 2019. Growth is projected to pick up to 3.4% in 2020, but this too was a 0.2 percentage point downward revision compared with April. According to the IMF, rising geopolitical tensions are driving increased uncertainty about the future of the global trading system, taking a toll on business confidence, investment decisions, and global trade.
Economic growth in 2020 looks precarious. Brexit continues to weigh heavily on the UK economy and a number of countries in Europe – most notably the UK and Italy – are under macroeconomic strain. Fears continue over a slowdown in China while US trade disputes with China and the EU are affecting trade – the disputes are forecast to reduce the level of global GDP growth in 2020 by 0.8%.
Our survey found UK businesses were the most pessimistic about the short term outlook. Against the backdrop of Brexit, UK firms were the only ones to be more likely to say the next 12 months is unpredictable than predictable (58% vs 42%respectively). However, when asked about the next 10 years, they fall back into line to match the confidence levels of businesses from
fall in domestic car manufacturing output in the UK
other countries. UK companies, in particular smaller firms, are being squeezed by increased costs related
to Brexit – namely from the weak sterling exchange rate, labour shortages and the cost of stockpiling for a no-deal scenario - and low domestic demand.
Consumer and business confidence has been subdued since the referendum in 2016, and many companies have deferred investment while individuals have cut back on big ticket items. UK new car sales declined 2.5% in the first nine months of 2019, while domestic car manufacturing output fell 10% in October, according to the Society of Motor Manufacturers and Traders (SMMT). The stagnant UK housing market makes for challenging conditions for the construction industry while the food and retail
sectors have had to contend with higher costs of imports and labour as the numbers of EU workers have declined.
We already see an increasing trend in insolvency as a result of Brexit uncertainty and paralysis. UK company insolvencies hit a five-year high in the second quarter of 2019, according to government data. The outlook for the UK is particularly hard to predict, being dependent on the outcome of Brexit and likely to affect trading relations, labour supply and supply chains as well as the direction of the world economy.
Industries like automotive, food and retail are also undergoing structural changes, which are changing business models, risks and opportunities for companies. The automotive supply chain, for example, faces a volatile period ahead with the transition from fossil fuels to electric cars. Regulatory incentives – such as caps on emissions or bans on certain fuels –
can have a sudden and drastic effect on demand and the value of assets.
Food and agriculture is also experiencing changing behaviour due to environmental considerations and societal trends. Diets are evolving, for health, ethical and climate change reasons, which is affecting consumer demand for
some products, such as red meat and dairy. More extreme weather is also impacting crop yields – this year’s record-breaking heatwave in Europe hit cereal and vegetable crops – while recent UK floods are expected to affect supplies of winter vegetables.
According to our survey, loss of revenue, unexpected costs and decreased demand are the three biggest impacts of unpredictable events. This chimes with what we see in sectors that are particularly exposed to economic, political and structural uncertainty at present. The Index also revealed that periods of stability are becoming shorter and periods of instability longer. Again,
this reflects the experience of trade credit, where periods of stress are shorter and decline more rapid. Companies now enter financial difficulties faster and with fewer indicators, such as the tell-tale signs of slow payment.
With increased uncertainty, businesses also need to be well informed and better at thinking ahead. Business intelligence is widely available, from industry contacts, credit agencies and associations, while trade credit insurers like QBE are a good source of proprietary information and insights. However, analysis should not be limited to risks, but also opportunities: Almost half of larger businesses we surveyed say they had seen some sort of positive impact from unpredictable events.
With the fast pace of change and unpredictability, businesses will
need to be flexible, able to move with the market and anticipate the potential impact of unexpected events or drivers for change, whether a new technology or climate change. Organisations will also need to build their trade credit resilience, which may require tighter payment terms and conditions, measures to mitigate losses or creating a more diverse customer base.
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